No More Learning

In Asia the Philippines was the surprise leader with a 45 percent jump, followed by Asean counterpart Thailand at 30 percent. India was up 25 percent although EPFR’s commitment tally was negative. Colombia squeaked by Mexico in that region with a 30 percent advance despite liquidation of a major brokerage there which slowed trading. The joint Andean index rose half that level, with Chile’s 5 percent lackluster result acting as a drag. Turkey was the Europe and universe champion with a 60 percent surge with Poland’s 32 percent a distant second. Hungary, which rewarded global houses like Franklin Templeton betting big on local debt, also managed a 20 percent share uptick as the government bought back a stake in energy heavyweight Mol. The frontier index lagged with a 5 percent increase as half the markets tanked and Kenya and Nigeria topped the charts with a 55 percent spike. The outcome was triple JP Morgan’s EMBI as such dizzying numbers may soon spin portfolios in another direction.

Argentina’s Flouted Flanking Maneuvers
2013 January 9 by admin

Posted in: Latin America/Caribbean
Argentina shares were at the rear of the MSCI index with a 40 percent blow although bonds moved into the positive EMBI column, as a US court decision on repaying holdout creditors was delayed until March and a UN tribunal ordered release of a naval ship seized in Ghana to satisfy judgments they obtained. President Fernandez’s popularity rating improved slightly to the 40 percent level on the legal confrontation with the “vulture” funds as well as with media at home on a new asset divestiture mandate and the UK and its diplomatic allies abroad on repeated post-war claims on the Falkland islands. Separately the US and EU filed trade complaints over agricultural and manufacturing import curbs, as Spain took its fight against oil company YPF’s expropriation to the World Bank’s investment settlement body, which has already awarded multinational firms billions of dollars in compensation from last decade’s pesofication actions. With dollars again scarce and subject to unwieldy controls smaller provincial borrowers have reprised that route, as the unsolicited sovereign rating was recently lowered by S&P to “B-“ on increasing policy risks. The downgrade noted that the eventual New York appeals court ruling, which will consider application of the “pari passu” equal treatment clause, may not affect debt service but could further impede relationship normalization with private and official lenders including the Paris Club as default enters its 12th year.

The medium-term economic view foresees “deterioration” with widespread government interventions, and high inflation and “rigid” spending. Real 2012 GDP growth will be only 1. 5 percent, and while foreign reserves are at $45 billion on strong beef and soy exports with just $4 billion in external payment due in 2013, liquidity could be constrained from both current account and financial market causes. Foreign investors who have bought both local and international corporate debt are closely monitoring the end-game in the Elliot Associates case, and holders who previously accepted the swap have organized as a group with their own counsel to demand an uninterrupted payment stream. The Federal Reserve has petitioned not to compromise Bank of New York Mellon’s trustee role through account release, while the State and Treasury Departments have urged that longstanding sovereign immunity practice be honored to the same end.

However the octogenarian presiding judge Griesa may have reached the limits of endurance with unsatisfied collection dictates when he initially ordered Argentina to deposit over $1 billion in escrow pending determination of the pari passu issue and sum. Awaiting the end-February hearing date Elliott has enlisted law scholars through the Washington-based Task Force Argentina advocating restructuring fairness to argue its interpretation and Argentine fund manager Puente has also entered the ring underscoring the wider damage from a ruling against the country. Meanwhile Greece’s second private sector haircut at a buyback price around 35 cents to the dollar was completed as the ECB will not countenance below par value redemption in that continent’s feuding pair.

The Berne Union’s Pungent Political Risk Sauce
2013 January 7 by admin

Posted in: General Emerging Markets
The World Bank’s MIGA direct investment guarantee arm offered a mixed annual take on developing country FDI trends with a near 10 decline this year, despite a better political risk climate under the Berne Union insurance body with record issuance directed at the post-Arab Spring Middle East and elsewhere. Demand has shifted to industrial economies and cover for sovereign financial obligations as opposed to the traditional war, expropriation and currency non-convertibility scenarios. Outward flows from emerging market-based multinational firms are at a record with one-quarter going to EM destinations. According to a survey of worldwide executives conducted jointly with the Economist Intelligence Unit, the top short-term allocation concerns are regulatory changes and contract violations, but only one-fifth purchase formal insurance as a hedging tool even as capital and deleveraging need reduce previous bank backstops. New public and private providers continue to enter the field with recent additions from Africa and Russia. In 2010 developing region FDI was 35 percent of global inflows and 15 percent of outflows. The $595 billion total for the former reflected a fall outside Latin America, with the BRICs taking 60 percent overall. Low-income economies receive less than 5 percent, although Sub-Sahara Africa’s annual amount is now almost $40 billion. China may have peaked and Europe and Central Asia suffered from Eurozone crisis links. Next year’s activity should increase 15 percent to $700 billion on a modest global GDP upturn, with half of poll respondents expecting company cross-border expansion.

Non-BRIC South-South ties have been promoted by a small cohort of resource-rich middle income source countries including Colombia, Chile, Malaysia, Thailand and Turkey, the report found. In commodities nationalizations have occurred in Argentina, Bolivia and Sri Lanka but the more common pattern has been royalty and tax revisions and greater state control throughout Asia and Africa in particular. MENA has experienced a “dramatic” drop in greenfield investment the past two years from $11 billion in 2011 to only $2 billion in the first half, compared with a pre-crisis haul of $115 billion. In Egypt the latest fiscal year volume was down 90 percent to $220 million while it rose 40 percent in the initial months of 2012 in Tunisia and may approach 2009’s tally of $2 billion, despite recent aversion from repeated civil unrest. Libya after its revolution and elections has launched a joint venture scheme where international partners can enter selected industries in return for workforce training.

Foreign banks however remain wary of credit deterioration which can aggravate political instability and lead to asset seizures and exchange restrictions. Risk insurance may be a preferred option with this year’s sum on track to beat 2011’s $75 billion from Berne Union members. Stricter EU solvency directives should not affect capacity and pricing as “soft” premium conditions last barring a growth boom or string of disastrous events which stir demand.



Europe’s Full Circle Fund Fealty
2013 January 7 by admin

Posted in: Europe
As the IMF hailed Greece’s private debt buyback result to reactivate its program contribution and prepared an outline Cyprus deal with troika partners, Central Europe relations returned to the spotlight as financial markets weighed new deal odds. In Romania, a resounding majority victory in parliamentary elections for Prime Minister Ponta’s party sent the MSCI index up 5 percent as his coalition signaled its intent to renegotiate another standby accord on upcoming expiration in March. His stronger position has raised fears of another constitutional confrontation that may attempt to oust the president from a main opposition group, but outcry from Brussels and political activists at home has kept a lid on the tense standoff. The government has argued the lack of alternatives to austerity policy despite near-recession this year and loud protests by labor and farming interests. Foreign positioning in the local debt market is lighter than in neighbors and banks under the auspices of the Vienna Initiative have maintained operation although they have transferred subsidiary support responsibility to local depositors.

In Hungary, by comparison, GDP contraction is 1. 5 percent according to the OECD, with 40 percent international ownership of the debt pile. The Orban Administration has dropped measures that alienated the EU and threatened elimination of cohesion aid, but talks with the Fund are in limbo as it claims to be able to access external sovereign markets and repay almost $15 billion in obligations coming due in the first quarter of 2013. It has angered bankers with indefinite extension of the original 3-year special tax on assets, as parents have cut domestic lines 40 percent since 2009 with the current NPL ratio at one-fifth the total by Fitch Ratings’ calculation. Budapest exchange stalwart OTP continues to report mixed results but remains committed to its big network at home and abroad as the index is ahead 15 percent. It outstrips the Czech Republic which is off 10 percent, but lags Poland with a 25 percent gain and three-quarters of overseas needs pre-financed at record low yields for next year despite GDP growth shaved to 2 percent. An IMF contingency facility to backstop reserves is in place as the zloty has swung often in response to Eurozone crisis events as well as fiscal and company developments, the latter featuring a slew of high-profile bankruptcies in the construction sector.

Ukraine was downgraded further into junk territory and has been the worst MSCI frontier performer with a 50 percent loss. The president dismissed his government after his Regions party secured a thin disputed legislative election win, as rumors circulated of a last-ditch effort to align with demands of the long-suspended $15 billion IMF loan, with repayments looming for one-third that amount next year. Foreign exchange curbs have been imposed to safeguard reserves dwindling from the current account deficit and capital flight, as customs union with Russia is a last-resort consideration.

The US Treasury’s Asia Rebalancing Recoil
2013 January 2 by admin

Posted in: Asia
The US Treasury again declined to brand China a currency manipulator under decades-old US law and instead directed criticism at Korea’s large won interventions, as President Obama headed to Asia after re-election to signal the region’s commercial and diplomatic importance under a second-term “rebalancing” strategy launched by the national security team. The visit featured an historic call on leaders in Myanmar and further negotiations on the Trans-Pacific free trade partnership yet to include Beijing and Tokyo as they engage in clashes over island ownership and geopolitical influence. Ten countries have signed on for the effort, which can inject momentum into the parallel Asia-Pacific Economic Cooperation forum and reviving the lapsed WTO round, according to officials. With the simultaneous government transition on the mainland, Washington think tanks and industry associations have prepared predictions and recommendations for the future relationship and output was incorporated into a recent task force report at the Center for Strategic and International Studies. It described the Chinese bilateral dialogue process as “routine and unwieldy” with the State and Treasury Departments spearheading exchanges of top-level representatives where “ceremony overwhelms substance. ” The biannual summit should be succeeded by more frequent informal sessions between executive-branch counterparts from the Vice-President to line agency heads, with financial sector reform as a priority issue, the panel suggested. It also called for more consultation within the G-20 group to revive the immediate post-crisis collaboration in 2008-09 which has since dissipated. In India comparable joint meetings have been launched, with the main result a “stalled” civilian nuclear accord as FDI retail liberalization is proposed into a cycle of state and national elections. Business executives aim to double trade to $500 billion by 2020, and the goal could be enshrined in a long-term “framework” pact that would include an investment treaty and infrastructure debt fund. Tax and small enterprise concerns should also be part of the agenda, especially as portfolio investors cited retroactive and offshore-center fiscal changes which were later diluted as early 2012 deterrents.

For Japan and Korea TPP entry should be promoted despite the opposition from agricultural interests in the former and the latter’s attention on implementation of the separate US trade deal which went into effect mid-year. The Korean opposition party has campaigned on a platform of renegotiating provisions which may extend to controversial auto industry opening. Exchange rate policy is a greater challenge with the Treasury report’s finding that operations exceed traditional “smoothing. ” On the finance side Seoul is headquarters for the Green Climate fund and clean energy innovation and investment mobilization could benefit from cross-border initiatives. ASEAN comprises 10 countries with combined GDP over $2 trillion as a top five US trade partner, and OPIC and the Export-Import Bank could contribute to public and private sector integration plans that manipulate the odds for shared prosperity, the CSIS paper concludes.

Ghana’s Oil-Peddling Poll Pitch
2013 January 2 by admin

Posted in: Africa
Ghana’s share index was up 15 percent through November on the MSCI in dollar terms on the eve of presidential elections pitting the incumbent who has held the post several months since John Atta Mills’ death against the same opposition candidate faced in 2008, a well-known lawyer whose family was prominent in the independence movement. The close race has not upset net foreign inflows to stocks and bonds this year, according to data collectors, as a 3-year IMF program was completed and initial offshore oil production has struggled below targets. Since liberalization investors have poured into the 5-year local bond, helping to lift the currency 5 percent since mid-year. However international reserves at $4 billion are down to just over 2 months’ imports on a 10 percent of GDP current account deficit. Traditional gold and cocoa exports have not kept pace with energy and capital and consumer good appetite, and economic growth is projected at 9 percent on inflation touching double-digits. Public spending ballooned before the typical election giveaway period on wages, subsidies and interest payments with the budget gap running at 9 percent of GDP. In its final review the Fund urged better tax performance among other steps under a clear debt management strategy in view of external commercial borrowing though Chinese banks and sovereign bonds. S&P reaffirmed a “B” rating contingent on windfall oil revenue due to be partially saved in a dedicated stabilization fund, and continued history of peaceful political transition.

In Kenya the opposite trend loomed with sporadic repeat of tribal attacks heading into next March’s poll as equities are up 45 percent on 700 basis points in interest rate cuts since August. The International Criminal Court has opened cases against top official implicated in the previous ethnic bloodshed including former Finance Minister Kenyatta, who championed a still-postponed inaugural sovereign bond issue. It may come in 2013 to refinance a 2-year syndicated loan taken out bringing the debt-GDP ratio to 50 percent. With good rains growth could reach 5 percent on inflation around the same number. Tourism has been hit by the Eurozone crisis with arrivals off 3 percent on an annual basis but balance of payments weakness which warranted IMF aid lingers with the current account hole at 10 percent of output. In Zambia the state electricity company is gauging potential demand for a second debt placement after the maiden one was 15 times oversubscribed, despite bans on opposition party activity and foreign currency use under the new government. Chinese-run copper projects have also been charged with labor abuses, a pattern also seen in neighboring oil-rich Angola which recently launched its own bond debut alongside a $5 billion sovereign wealth fund. The petroleum monopoly cannot account for over $30 billion in revenue from 2007-10 according to the IMF which just finished its program as the offering sheen may soon wear.

The Arab Spring’s Obscured Occasions
2012 December 28 by admin

Posted in: MENA
The second anniversary of the Tunisia-originated Arab spring coincided with struggling MENA stock markets as pacesetter Egypt retraced its MSCI climb to 30 percent on popular backlash against President Morsi’s pre-emptive constitutional moves and backtracking on tax pledges which delayed IMF board endorsement of a near $5 billion loan into next year. Foreign investors who had tentatively re-entered the local Treasury market and were calmed by the President’s brokering of a ceasefire between Israel and Hamas on the Gaza Strip, reiterated doubts about the Muslim Brotherhood’s political and economic intentions, with key donor Gulf monarchies also wary of the cause in moving to honor previous financial pledges. Foreign exchange reserves are down to $15 billion on trade weakness and intervention to hold the pound at the 6 to the dollar line in the name of stability. The central bank has also stayed the course with the benchmark interest rate as lower food prices bring inflation to 5 percent, although fuel cost has increased with propane subsidy removal. French-owned units may be sold as parents try to raise capital, with FDI and privatization activity otherwise on ice. Big listed companies especially in the property sector are still under investigation, and former president Mubarak’s family members could soon be put on trial for alleged corruption and embezzlement of state funds.

In Tunisia, where the Ben Ali retinue fled prosecution, the bourse was off 10 percent in December amid talk that it too may seek IMF support. Protests and strikes continue against the interim Islamic party-led administration as youth unemployment hovers at 40 percent with migration to Libya again an outlet with the end of the Kaddafi era there. Elsewhere in the Maghreb Morocco, which is under a $6 billion IMF program, was down 15 percent as the other MSCI Arab core member although a $1 billion 10-year sovereign bond was several times over-subscribed. With the technocrat prime minister facing reform opposition and new elections scheduled soon, the eager response was seen more as evidence of global debt froth.

In the Gulf the sukuk wave which surpassed $20 billion has diverted momentum from equities, with only the UAE and Saudi Arabia positive for the year at respective 20 percent and 5 percent gains. The Islamic bond segment was shaken however by the Emirates’ Dana Gas restructuring following a brief default. Foreign hedge funds received a late cash payment and agreed to a swap involving high-yield normal and convertible instruments. Bahrain and Oman were at the bottom of the pack with 10 percent declines, while Kuwait was flat after another round of boycotted elections. Jordon and Lebanon continued to experience a refugee and cross-border commercial toll from the Syrian civil war in another instance of halting historic hope.

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Brazil’s Aggrieved Intervention Instincts
2012 December 28 by admin

Posted in: Latin America/Caribbean
Brazilian stocks were off 10 percent into December as the main Latin American market laggards as Q3 GDP growth came in just over half a percent squashing the full-year forecast to the 1 percent range, and Finance Minister Mantega acknowledged the real’s “dirty float” on central bank intervention to maintain a 2. 0-2. 1 to the dollar band. Banks sold off as the government continued to urge lending with the benchmark interest rate brought down to 7. 25 percent, with state-run units in particular still expanding corporate and consumer books while private ones concentrate on handling NPLs over 5 percent for the industry and cutting costs. Annual credit growth has cooled to a more sustainable 15 percent, but high double-digit borrowing rates have barely budged with officials and banking executives engaged in a cycle of recrimination over policy and return drivers. The same divide has extended to utilities, where electricity firms went bankrupt under existing operating and tariff structures and were rescued by public providers as President Rousseff ordered further cuts in charges to aid industry and consumers. Heavyweight shares Petrobras and Vale are also flailing with the uncertain global commodities picture and entanglements at home, including a huge back tax bill for the former and demands for infrastructure project support for the latter as World Cup preparations were found to be behind schedule by a visiting delegation.

The comparatively low Doing Business rank and investment ratio have raised doubts about the post-stabilization model, and were cited by Moody’s in keeping the current sovereign rating in place. It also stated that the interest-servicing burden at 15 percent of revenue and gross financing needs at 15 percent of GDP were “outliers” in its high-grade category. The primary budget surplus will be under the 3 percent target this year, and structural reforms to the pension and tax systems are proceeding slowly with the ruling party relying on multiple parliamentary allies for passage. However corruption convictions and prison sentences for associates of former President Lula may help purge the legacy of shady political dealings which resulted in regular cabinet turnover early in the administration’s term. Rumors now circulate about possible reshuffling of the economic team on signs of backtracking from initial tough trade and capital flow approaches. After complaints from neighbors as well as the US and Europe auto import and other restrictions may be loosened, while export credit and long-term borrowing controls and levies have been eased with the 6 percent transaction charge lifted for 2-year facilities.

The capital curb rethink may conform to the new IMF “institutional view” adopted after publication of a staff paper that urges measures be balanced and temporary and take into consideration multilateral spillover effects. They should be a last resort after normal macro-economic and prudential steps, and future work will focus on possible coordination of international standards instead of standard confrontation.





Venezuela’s Succession Speculation Splurge
2012 December 27 by admin

Posted in: Latin America/Caribbean
Venezuelan bonds buttressed their EMBI-leading 40 percent run as President Chavez returned indefinitely to Cuba for further major cancer surgery and treatment and named his longstanding ally Maduro as preferred successor, as his party swept state governor races with the notable exception of opposition candidate Capriles’ victory in his jurisdiction. A new term begins in January coinciding with a decade of currency controls, as the informal bolivar rate is quadruple the official 4. 3 with supply down sharply through the central channel amid widespread assumption of another post-election devaluation. GDP growth of 5 percent on massive public spending spawned a large budget deficit and double-digit inflation heading into next year when the economy could enter recession, especially if world oil prices continue to drop. Another $25 billion in debt issuance was authorized mainly for the domestic market, and Chinese loan for petroleum facilities have not been clarified as joint venture projects in the Orinoco belt remain on hold pending tax and arbitration disputes. Capital flight at $15 billion though Q3 exceeded the current account surplus and FDI was negative as portfolio inflows were $4 billion. Vice President Jaua signaled a status quo business climate including nationalization would extend into the incoming administration, with the food and construction sectors to be possible repeat targets as basic staple and housing shortages persist.

Positive relations have been restored with top trade partner Colombia, where GDP growth above 4 percent has translated into a 25 percent stock market gain as peace negotiations were launched with the rebel group FARC which had allegedly received cross-border financial and military support. Foreign fixed-income investors await the reduction and simplification of withholding tax there under a multifaceted fiscal reform package that will cut corporate rates. The Andean growth champion however at 6 percent is still Peru on a combination of commodities and domestic demand, with the latter spilling into an overheated property sector in the view of industry analysts. The international share of local benchmark debt is near 60 percent despite regular central bank currency intervention and macro-prudential restrictions to discourage allocation.

In contrast with the sub-region’s upward trend Argentina’s bonds lost ground with US court rulings tilting toward full-payment of “holdout” claims, including potential access to the servicing stream for exchange instruments from the re-opened 2010 deal. An appeals tribunal hearing is set for end-February to decide on an amount and mechanism for honoring principal and interest arrears, and Buenos Aires my consider amendment of the original “lock law” to mount another offer at its initiative. GDP warrants were fully redeemed in mid-December with the postponement of a final decision which can still be sent on to the Supreme Court in Washington. According to the latest EMTA debt trading survey the country stayed absent from volume favorites led by Brazil and Mexico, although activity was off one-quarter on an annual basis as the asset class succeeds to long-term position ranks.



Capital Flight’s Elusive Estimate Integrity
2012 December 27 by admin

Posted in: General Emerging Markets
The Washington-based illicit flow watchdog group Global Financial Integrity adjusted and criticized World Bank methodology to reach higher calculations for developing country exit through 2010, with China dominating the pack but MENA numbers growing fastest in a precursor to ensuing political and economic revolts. The new approach attempts to eliminate legitimate capital outflow for commercial purposes from the total, but still encounters the difficulty of tracking movements from origins with opaque sovereign wealth funds. Hot money transmission of both types increased over 2009 which was the height of the global credit crisis. The loss ranges from $850 billion to $1. 2 trillion for all regions, implying a 15 percent annual jump over the decade. False trade invoicing is the overwhelmingly preferred channel, with only 20-30 percent resulting from other balance of payments leakage. Asia accounts for 60 percent of the figure, mainly from China and India. The Western Hemisphere is next at 15 percent, followed by the Middle East at 10 percent, and emerging Europe and Africa are roughly equal with 7 percent. Yearly outflows spiked 25 percent from Gulf oil producers, with Sub-Sahara Africa almost matching the pace. Russia is an exception to the traditional manipulation of import/export billing as unrecorded transactions continue to drive the phenomenon, which the central bank puts for 2012 around $80 billion.

Banks and companies have also tapped the Eurobond market for half that sum, even as corporate governance scores remain low and ratings agencies warn about the 30 percent rise in consumer lending. At the opposite extreme is Chinese under and over-invoicing for 90 percent of activity, as export growth was subdued during the communist party leadership switch and the island standoff with Japan further hampers cross-border trade. The capital account tipped into quarterly deficit as residents moved offshore both to park funds and seek better returns than in the flat Shanghai stock exchange despite bargain valuations. Cumulative illegal flight from 2001-10 was $2. 8 trillion, five times runner-up Mexico’s at $475 billion fueled by drug cartel money. This year in contrast foreign portfolio investment is at a record, with allocation to government bonds at almost $40 billion as equities are up 25 cent on the MSCI index. PRI President Pena Nieto again pledged energy and tax reform at his inauguration along with near-term elimination of the budget deficit.

Malaysia is third at $285 billion with ethnic unease combining with commodities riches, and the pattern may be repeated as the ruling National Front may resort to religious and populist devices to avoid addition erosion of its parliamentary majority in imminent elections. India and Nigeria are tied at about $125 billion, and their respective stock markets are ahead 20 percent and 40 percent into December. The Singh government in its final stretch has moved to slash state control in the retail and other sectors which may aid the problem, while Nigeria’s new $1 billion sovereign wealth pool intends to break with past flighty behavior toward petroleum proceeds.

Mongolia’s Hortatory Herd Behavior
2012 December 19 by admin

Posted in: Asia
Following its development bank deal several months ago, Mongolia debuted on the sovereign scene with a gangbuster 1. 5 billion dual tranche offer at a 5 percent yield for the 10-year instrument that again turned away buyers despite the BB credit rating and a critical Article IV report from the IMF which ended a post-crisis standby in 2010. Political risk has also intensified after the nationalist Democratic Party won the most seats in parliamentary elections and spurred coalition partners to review foreign investment projects and rules in the mining sector, as a Chinese state company coal producer takeover was rejected on corruption suspicions. Through September GDP growth was 10 percent on credit surging at three times that clip, which along with rising food prices spawned 15 percent inflation. The central bank has tightened but real interest rates remain negative, as the fiscal position likewise blew out to a deficit of 5 percent of GDP on a 40 percent spending increase for wage hikes and cash transfers. The trade gap is quadruple that level and the currency is down over 5 percent against the dollar as authorities have tapped a swap line with China to bolster net international reserves at a 2-year low of $1. 5 billion. As giant new mines go operational next year export earnings will jump $2 billion according to the Fund, and Tavan Tolgoi is expected to list a 20 percent stake on the stock exchange in the first half. The Development Bank has an off-budget medium-term external borrowing plan of up to $5 billion that circumvents fiscal stability legislation, and a sovereign wealth fund that can accumulate savings has yet to be launched. One-third the banking system is dollarized as tougher 14 percent capital adequacy ratios go into effect in 2013 and unhedged exposure poses a threat. The government bond market is undeveloped despite technical assistance from multilateral institutions, and the World Bank’s Doing Business rankings leave “ample scope” for regulatory improvement as the overall minerals investment regime is revised, the analysis adds.

In South Asian frontier market Sri Lanka which joined JP Morgan’s debt benchmark, local bond access for non-resident has improved as the rupee stabilized following a shift to a free-float. Equities are off slightly on the MSCI index on credit limits slowing GDP growth to 7 percent as the fiscal deficit is the lowest in decades. Drought has propelled inflation to near double-digits, and reconstruction aid is under donor scrutiny from continuing unease over Tamil treatment post-civil war and family dominance of government positions, although a former defense minister accused of coup plotting was released from prison. Shares in Bangladesh worsened to a 15 percent loss after a textile factory fire killed 100 workers and highlighted unsafe low-wage practices. The main political parties have traded blame for the tragedy as they prepare for upcoming elections with the military again ready to charge in to preserve its domain.

Global Remittances’ Staggered Movements
2012 December 19 by admin

Posted in: General Emerging Markets
The World Bank’s Remittances Unit estimated a 6 percent increase in developing country flows this year to $400 billion and a medium term ascent to over $500 billion while criticizing “still high” transaction costs at an average 7. 5 percent. In contrast with private capital allocation the channel has been “remarkably resilient” since 2009, and is now triple the annual sum of official development aid. All regions led by South Asia and the Middle East from strong GCC performance benefited, although Europe-based workers suffered from recession and unemployment. China and India were the top recipients at $70 billion each while as a portion of output Central Asian and African countries got one-third of GDP from the source. The US is the largest sender and high-skilled jobs have recovered, but Mexican transfers are flat on tighter immigration control and peso appreciation against the dollar. The migrant out-of-work rate in Spain is 30 percent and Eastern Europeans such as Poles and Romanians are returning home with the West’s crisis. North and Sub-Sahara Africa have likewise been hit but expatriates have stayed despite threats of deportation. Outward remittances from Russia have boomed at the opposite extreme to $5 billion with the world oil price around $100/barrel. The exchange rate has slowed activity in the Philippines, with overseas workers on all continents who have traditionally assumed peso depreciation at odds with the current trend of record foreign investor portfolio exposure. In the main 20 remittance “corridors” expenses remain steep despite the commitment to reduce them 5 percent over the next five years. The African toll is 12. 5 percent of the amount transmitted, and Russia’s is cheapest at 2 percent, with the Gulf and UK in the middle. New anti-money laundering and terror funding rules from the FATF will add burdens likely to be reflected in pricing, and mobile business continues to be constrained with only one-fifth of providers with cross-border links. Central banks and telecom authorities must cooperate to bolster the segment as in Kenya and the Philippines, the document recommends. For the Pacific Islands an Australian website lists the range of sending options to assist individuals and companies as a useful initiative.

Next February stricter money transfer disclosure goes into effect in the US under the Dodd-Frank law, following a similar EU directive. It introduces consumer protections as to cancellation and refunds and error correction, and itemizes fee, currency and tax charges. The tight identification requirement may hurt the poor without such access, and agents may delay until refund periods expire which could inject undesired inefficiency into the technologically-advanced process. Among single countries, the report cites a post-Arab spring “surge” in Egypt to almost $20 billion this year offsetting other weak balance of payments elements as the outline $5 billion IMF deal comes with a supporting remit.

Credit Default Swaps’ Trussed Trade
2012 December 12 by admin

Posted in: General Emerging Markets
Unlike other components in the booming fixed-income class, credit default swap activity was off 20 percent in annual terms in Q3 to $215 billion, according to EMTA’s survey. In sovereigns Brazil, Mexico and Turkey had $20-30 billion turnover, while state oil companies in Russia and Venezuela led that segment. In the period the EU naked short-selling ban became permanent, along with a narrow interpretation of the market-making exemption as counterparties and dealers scrambled to dump portfolios. The Markit regional index lost Bulgaria, Hungary, Lithuania, Poland and Romania accounting for 30 percent weight, but left in place Croatia which joins next year and Ukraine which seeks an association agreement. For the 27 members in total sovereign CDS volumes and spreads dropped coincidentally since the summer with the ECB’s bond-purchase declaration and indications Greece would not exit the single-currency. The emerging market constituent premium came in 100 basis points, despite scares relating to Hungary’s negotiations for an IMF facility and Romania’s adherence to an existing one. Both are near recession and have drawn criticism from Brussels for anti-democratic practices.



Budapest’s fiscal deficit should stay within the 3 percent of GDP needed to maintain cohesion fund access, but banks will be subject to special tax continuation and a new transaction levy. Public debt is stuck around 80 percent of output with the central government’s assumption of municipal obligations and costly and inefficient health care system. Interest rates have been cut despite 5 percent inflation and another credit downgrade to BB brought condemnation of the rating agency as “speculators” in rhetoric designed to alienate foreign direct and portfolio investors. Romanian parliamentary elections in December will be held amid a truce between the ruling coalition and president Basecu in their power struggle, but the winning parties must prepare for expiration of the EU-IMF accord next March. International banks have reduced lines and privatization attempts stumbled after early momentum as the weak currency drifts toward 5 to the euro.

Poland had been Central Europe’s growth champion, but the current GDP advance is less than 2 percent as monetary loosening begins there too.
A post-Euro football cup hangover has claimed several construction firms, and a pyramid scandal in the non-bank sector implicated the prime minister’s family. A privately-owned bank IPO has brightened equities enjoying a double-digit gain, as global bond issues command record low spreads with the aid of a $20 billion IMF contingency line. Croatia has turned in negative MSCI results as it heads for EU entry in July 2013 with resolution near on a longstanding dispute with Slovenia over post-Yugoslavia claims from ailing lender NLB. Tourism tax decreases should boost inflows to help balance the current account deficit, and gross external debt above 100 percent of GDP warrants a negative sovereign outlook as the budget tries to swap its previous overspending fate.

Korea’s Covered Election Campaign Glory
2012 December 12 by admin

Posted in: Asia
Korean shares continued as mid-pack Asian performers into the final presidential election swing as the independent candidate withdrew in favor of the opposition with both contenders preaching “economic democratization” to reduce chaebol power and boost small business. Regional corporate bond leadership was lauded by the ADB in its quarterly update showing local currency issues outstanding at $6. 2 trillion as a covered bonds law went before parliament after pilot transactions by state banks backed by mortgage and credit card receivables. It dictates 105 percent face value guarantee by the asset pool, as the central bank moves to establish one-third of mortgages as fixed-rate by mid-decade to remedy the heavy household debt burden. The interest rate easing bias is slated into next year with electronics exports picking up in Q3 on GDP growth of 2-3 percent. A part of the projected fiscal surplus may go for consumption and infrastructure stimulus as the 2013 government intends to tilt contract and policy support to non-chaebol firms which have enjoyed a run both on the main stock exchange and Kosdaq in response. Both the major parties promise to untangle cross-shareholdings and bar the conglomerates from traditional shop competition. The securities regulator has warned retail investors of “overheating” in tiny illiquid listings relying on “political themes. ” Local brokers also advocate diversification into foreign stocks with allocation doubling to almost $50 billion in the latest quarter. Long-short positions in tech companies are a common strategy juxtaposing domestic and overseas giants. The National Pension System with $330 billion under management has a medium-term target for international exposure at one-fifth its portfolio as it registered a measly 2. 3 percent return in 2011. For bonds the goal is 10 percent as currency appreciation is sought beyond the won brushing the 1100/dollar handle. With a 5 percent uptick against the greenback despite intervention banks have come under investigation for possible breach of forward limits.

With this pressure alongside withholding tax, foreign investors have pared Treasury bond ownership to 10 percent of the total. Moody’s dismissed the crackdown in an overall positive banking sector assessment after stress-testing. The tier-one average capital ratio tops 10 percent but personal and corporate credit troubles could test the regulatory threshold while not impairing confidence, the agency suggested. With chaebol reform in particular loosening the chokehold of founding families and North Korea turned quietly with its own transition, the traditional valuation discount could ebb in the near future more generally, many commentators argue. On the nuclear worry, fund managers point out far more volatile conditions in Pakistan where the MSCI index is up 20 percent and external bonds have rallied in the absence of a reprised IMF program. Into its own imminent poll, energy shortages are widespread as the central bank covers the 6. 5 percent of GDP fiscal gap and US defense and aid cooperation breaks from past glory days.

Asean’s Churlish Charm Offensive
2012 December 10 by admin

Posted in: Asia
Asean stock markets led by the Philippines’ 30 percent spurt were in the spotlight as re-elected US President Obama and IMF Director Lagarde embarked on commercial and diplomatic offensives there to solidify multilateral crisis and bilateral free trade support. The Fund received additional credit lines for its doubling of resources agreed after the former French finance minister took the helm, and Washington completed another round of Trans-pacific partnership pact negotiations as an historic chief of state visit to Myanmar marked an element in the Administration’s Asia repositioning strategy. Before the swing Malaysia drew North American attention with oil company Petronas’ bid to acquire Canada’s Progress Energy, which was rejected for “no net benefit. ” The new chief executive in place since 2010 has embarked on global expansion and tried to reduce its transfer to the budget amounting to 40 percent of the total, as such moves and a wave of IPOs have revived foreign investor interest in the Kuala Lumpur Exchange. Prime minister Najib has stoked domestic demand with pre-election fiscal largesse leaving a 4 percent deficit on 5 percent economic growth. Postponement of food and fuel subsidy adjustments has kept inflation in the 2 percent range, with the central bank on hold as international appetite remains strong for both conventional and Islamic-style government paper. The ruling party hopes to regain its two-thirds majority after the previous watershed post-independence defeat but the opposition has diverted Chinese backing and earned sympathy from a harsh security crackdown on rallies. In the balance of payments, the current account surplus has dwindled with electronic assembly and commodity earnings corrections. Fears persisted that the accounts could follow neighboring Indonesia into outright deficit, but Jakarta tipped into the positive column in Q3 spurring $4 billion in portfolio inflows. Despite a credit slowdown consumption continues to undergird 6 percent GDP growth as palm oil and coal export prices are weaker. The investment promotion agency has launched a road show designed in part to neutralize the fallout from the Bakrie Brothers saga, which opened another chapter with a Rothschild counteroffer for the London-listed conglomerate.

The Philippines is poised to touch investment-grade territory after a Moody’s upgrade as foreign buying of equities is up 40 percent to $2 billion. Tax collection has improved and President Aquino has signed a peace deal with the Moro rebels in Mindanao. Public debt/GDP has fallen to 50 percent and $20 billion in annual remittances continue to bolster the current account and currency. Business process outsourcers have taken business from India, and tourism has jumped with a recent open-skies accord. GDP growth will be 5 percent on 3. 5 percent inflation following agriculture cost pressure from October flooding. An anti-corruption drive has ensnared ailing former president Arroyo, accused of embezzlement while in office detracting from her image as a wealthy establishment representative and highly-educated economist.

Latin America’s Awkward Middle Class Angst
2012 December 10 by admin

Posted in: Latin America/Caribbean
As Latin American stock markets mostly ride a wave of consumer optimism, the World Bank completed a comprehensive survey of middle class dynamics the past decade which praises progress but raises questions about definitions and sustainability. It combines regional household income and standard poverty figures within a broad construct of economic security to arrive at an additional class of near-poor that teeter on the per-capita $10 dollar/day, although often counted among the 30 percent of the continent’s population or over 150 million now in the middle tier. This vulnerability persists despite higher GDP growth and lower inequality trends; over the past 15 years in 18 countries 40 percent of citizens showed upward mobility. The tendency was greater in Brazil and Chile than in Paraguay or Guatemala and came in Argentina and Uruguay as the at risk segment attained middle-class status. Graduation was likelier with college education, urban domicile and formal sector employment, which in turn fostered public social spending. However intergenerational advance remains limited as the family pattern may repeat particularly in places like Ecuador, Panama, and Peru far from establishing equality of opportunity by law and practice. School “sorting” confined to the privileged and rich is pervasive, although lower rungs are entering elite universities with outreach programs and better nutrition and physical infrastructure to support study. Middle income jobs are found in both manufacturing and services and the public and private sector, although Honduras and Mexico emphasize an official track. Average family size fell by one to three since the early 1990s and 75 percent of women either have or are actively seeking work. They uphold values including trust in political institutions and parties and spurn violence as path to government change. With “re-democratization” the social contract has shifted as well with more functions demanded of the state even as the average tax revenue base was just 20 percent of GDP in 2010. Pension and social security benefits, electricity and roads, and physical protection are now among class expectations.

The review urges expansion and modernization of safety nets and training programs in preparation for the next phase of consumer development with a “less friendly” external environment than during the commodity boom period of recent years. With that positive backdrop Latin external bond issuance through Q3 was a record $120 billion according to data source Dealogic. The largest local markets have more than doubled since 1995 by BIS calculation, and mainly state company placement in the US reached $70 billion. In number one domestic market Brazil corporate activity was $40 billion through September. Dollar bond yields on the regional component of the CEMBI were 4. 3 percent in November, a pickup of 150 basis points over global high-grade instruments. Tax incentives will soon be available for foreign buyers of Brazilian infrastructure and mortgage bonds as regulators try to lift the asset class.

Iceland’s Jagged Control Cliffs
2012 December 5 by admin

Posted in: Europe
Iceland, the original developed country applicant for post-crisis bilateral and multilateral aid, has begun repaying the IMF and Nordic partners after a $1 billion Eurobond return as next year’s deadline for lifting exchange restrictions will now likely be extended to 2015 according to the Fund’ post-program monitoring. GDP growth was 2. 5 percent in the first half while inflation was twice the target at 4. 5 percent. Emigration has slowed with the broader Eurozone mess with unemployment off the 9 percent peak, although long-term joblessness remains acute. The stock and real estate markets are up and two of the main three banks have issued covered bonds although credit expansion is “negligible. ” Household debt is still above 100 percent of output, and the corporate load has halved since 2008 to 180 percent. Foreign reserves are over 100 percent of short-term obligations as Landsbanki covered 50 percent of priority external claims the past year, but only “limited” reduction affected the overall stock of offshore krona, with full release now envisaged at mid-decade. Earlier capital account liberalization could be “disorderly” as residents also exit and the weaker exchange rate heightens inflation. The initial opening will be gradual through auctions and a departure tax under officials’ new strategy. Non-resident krona holdings amount almost to 25 percent of GDP, and conversions into long-term euro-denominated bonds may be the preferred path for resolution.



The budget continues to run a slight deficit and upcoming elections work against plans to raise hotel and social insurance charges. A key revenue move is fishing quota restructuring toward a transferable rights system which can collect 1 percent of GDP. Real interest rates are now positive after 100 basis points in central bank hikes, but banks suffered losses from court-ordered recalculation of indexed loans on NPLs still at 10 percent of the total. Capital adequacy is high at over 20 percent of assets, as Basel III liquidity standards are adopted with a moratorium on dividend payments. Litigation from the original Icesave depositor deal with the UK and the Netherlands poses a risk, with demands that the state treat them as full contingent liabilities. Even with this scenario the review concludes that official creditors including Scandinavian providers are in a “good position” to be reimbursed.

Swedish authorities likewise came to the rescue in Latvia, which has regained investment-grade status after it managed “internal devaluation” within a euro peg as an EU success in contrast with Greece’s subsequent slide. Lithuania had followed lesser austerity which was seemingly shunned in a leftist lurch in recent elections, while Estonia’s AA credit rating was reaffirmed in October as its MSCI frontier stock index was ahead 15 percent. S&P cited political stability and the “unleveraged government balance sheet” with wage pressure from health service and teacher strikes under more flexible control.

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South Africa’s Tender Tipping Points
2012 December 5 by admin

Posted in: Africa
South African stocks and bonds took a beating as the deputy head of the ANC, on the eve of a critical part congress, warned of a “public tipping point” as mining strikes persisted and spread to other industries in criticism of pay and working conditions and favored deals for “tenderpreneurs” close to the government. The Johannesburg exchange index struggled to stay positive on heavy net foreign outflows while fixed-income support lingered precariously from recent entry into global bond benchmarks. The monthly trade deficit skyrocketed sending the rand toward 8. 5 to the dollar as official unemployment again surpassed 25 percent. President Zuma faces internal discontent although a leadership challenge is unlikely for the remainder of his term expiring in 2014. Should the 70 year old incumbent seek reelection he may face candidates both from within his coalition and the opposition Democratic Alliance which has begun to attract backing beyond core white voters. His administration has been accused of inaction during the labor violence and mass layoffs at precious-metals producers and a belated bid to ease tensions risked further alienation with mixed signals on state intervention. In an effort to boost the economy generally a 3-year $100 billion infrastructure program was unveiled but the sovereign rating is already slipping on higher fiscal deficits. The public wage bill may still grow 10 percent annually according to the medium term budget strategy just released which raised immediate borrowing requirements. Trend GDP growth of 3. 5 percent may not return until mid-decade when the debt portion is slated to stabilize at 40 percent. The central bank is reluctant to lower rates with inflation at 5 percent on energy and food prices which separately temper consumption, and with foreign portfolio allocation needed to bridge the over 6 percent of GDP current account gap. Listed gold and platinum miners also seek new capital after absorbing the unrest losses. Lonmin plans an $800 million London offering that will rely on its anchor Xstrata with a 25 percent stake and still trying to salvage a merger with commodity giant Glencore.

Automakers have experienced their own actions resulting in hourly salary rises, as the industry globally is suffering from economic slowdown and incentive program expiry. On the stock exchange resource firms are shunned in favor of retailers and banks expanding across the continent, while entry into Citigroup’s World index may channel $1 billion per month into government bonds. The latest budget contemplates $500 million in external issuance next year, as “switch auctions” are conducted to smooth the longer-term maturity profile. Primary dealers with the non-resident surge have fully participated in these swaps so far but the main public pension fund operates now under more flexible guidelines and banks may soon feel balance sheet cracks with leaning consumer and corporate loans.





Nigeria’s Sticky Upstream Upgrades
2012 December 3 by admin

Posted in: Africa
Nigerian shares topped the frontier MSCI list ahead almost 50 percent as a sovereign rating upgrade to BB followed inclusion in the local JP Morgan index benchmark, and the stock exchange under a new chief executive previewed a raft of upcoming IPOs after a long post-crisis drought. To pave the way a handful of companies will be delisted after fifty were suspended temporarily from trading pending accounting updates. Foreign investors have recently absorbed two-thirds of daily volume and stiffer licensing standards will consolidate the brokerage industry. With petroleum sector modernization private entrants may be represented in the still bank-heavy market. Prominent investigations have revealed widespread fraud and corruption in energy dealings the past decade to the tune of $30 billion, with $7 billion alone lost from 2009-11 fuel subsidies before reform. Under the bill signed by President Jonathan and pending in parliament the state monopoly NNPC, at the bottom of its peer group according to Transparency International, would continue to control all operating aspects with multinational partners, although it could be partially privatized over time. A deal with Shell-Eni has come under scrutiny for an alleged $1 billion bribe and recent oil spills by Royal Dutch Shell and Chevron in the Delta region have triggered claims at a multiple of that amount. T-bill yields have crept up again after the post-index addition rally to 14 percent as the central bank stays on hold to attain the single-digit inflation goal. With portfolio inflows reserves are over $40 billion as the sovereign wealth fund was launched with a $1 billion endowment to be overseen by a former Goldman Sachs banker. Returning expatriates are welcomed but often subject to vicious criticism for forgetting local mores. Head of the Securities Commission Oteh, who previously served at the African Development Bank, was placed on leave on mismanagement charges thought to be instigated by professional and legislative subjects of her governance crackdowns. The President declared his support after she was cleared initially but lawmakers continue to call for dismissal.

Kenya has matching performance to date as the central bank slashed the policy rate another 200 basis points on exchange rate and inflation stability and good banking system stress test results. Through mid-year credit growth was half 2011’s 30-percent plus level, as Moody’s assigned a B1 sovereign rating warning about the 50 percent/GDP debt ratio. The 2-year $600 million syndicated loan is priced at near 5 percent over LIBOR and in the next fiscal year a $1 billion Eurobond is planned for refinancing. Domestic debt may also be restructured under a medium-term strategy as GDP growth was 3 percent in Q2 as pre-election fear and lethargy again loom. President Kibaki steps down for good next March and sporadic ethnic clashes have broken out which may once more keep the economy from entering the breakout phase.

Slovenia’s Listing Lake Lurches
2012 December 3 by admin

Posted in: Europe
Slovenian shares extended a 10 percent loss as banks NLB and NKBM prepared rights issues to meet European regulatory requirements, as government support for recapitalization may be subject to a referendum at labor union insistence amid rumors a larger EU rescue request is imminent. Recession has set in and will continue next year according to official and private projections, and a further sovereign downgrade may come from contingent liabilities from the state bad banks which have pushed debt/GDP over 60 percent. The units have resisted privatization since the breakup of Yugoslavia with a popular mistrust of FDI reflected in politics and the debate over joining the euro. The recent presidential race resulted in a second-round faceoff between the incumbent and a former prime minister who both advocated minimal liberalization. With “A” rating normal annual refinancing needs of 4-5 percent of GDP could be met should the external bond market stay open as during an October $2. 25 billion 10-year tap. However the structural reform agenda is stuck with a range of state-owned enterprises and the pension system representing “negative feedback loops” in the words of the IMF. Non-performing loans are at 15 percent and a central resolution agency has been created to tackle the load but is not yet operational. A 2010 minimum wage hike has eroded competitiveness and generous tax incentives may limit revenues. The Fund’s Article IV report questions rigid worker protection which disadvantage young and female professionals. It recommends that blocking shares and majority control be relinquished to outside investors in the business and financial sectors alongside an effort to improve local prudential supervision and EU coordination.

Serbia’s equity performance has been equally dismal, with a new coalition coming to power headed by a former ally of the Milosevic regime advocating greater economic intervention as he abruptly sacked the previous central bank governor. GDP has fallen 1. 5 percent as credit growth finally settles at a single-digit pace with NPLs over one-fifth the total on an industry loan-deposit ratio above 125 percent. Three-quarters of credit is in foreign currency and the timetable for renegotiating a Fund standby arrangement is uncertain. Inflation and the current account deficit are both in double digits as the dinar continues to depreciate against the euro. Sub-regional favorite pupil Former Yugoslav Republic of Macedonia, which qualified for a contingent pre-qualified line for good policy records, has likewise been down 10 percent on its local index. With relative fiscal prudence at a deficit of 3 percent of GDP, officials have managed to borrow externally with a $75 million recent loan from Deutsche Bank, as they plan to extend the domestic yield curve at the same time. It has worked to foster a reputation for sound outward-looking management in contrast with neighbors Greece and Slovenia as their entwined histories fray.

The EBRD’s Deconstructed Deleveraging Design
2012 November 27 by admin

Posted in: Europe
Along with its annual Transition Report, the EBRD with a new president drawn from the British civil service circulated a bank Deleveraging Monitor under the auspices of the Vienna Initiative which showed marginal quarterly improvement in the size of cross-border Central, Eastern and Sothern European withdrawal to 0. 8 percent of GDP. Since 2011 the cumulative drawdown has been 4 percent of GDP, with Hungary and Slovenia worst hit at 10-15 percent followed by Bulgaria, Croatia, Lithuania and Serbia at 5-10 percent. The organization noted that the ECB’s bond-buying announcement eased lending conditions with demand and supply still subdued. Through mid-year business and household credit growth was barely positive even though domestic deposits were up in many countries in line with parent group strategy to boost subsidiary self-reliance. The eight institutions surveyed with 40 percent of regional assets are “becoming more selective” in individual markets through a wide range of economic and industry considerations including local and EU regulation. A chapter in the Transition publication elaborates the theme of pan-European architecture and proposed banking union in particular from emerging member perspectives. It stipulates initial lessons from the 2008-09 crisis against outside foreign control when tied to external funding, but cites the difficulty of mobilizing internal resources with macroeconomic and capital market gaps. On supervision the home-host country split has been problematic as shown by the early example during the Baltic boom when Estonian officials unsuccessfully asked Swedish counterparts for stricter prudential standards. Bulgaria, Croatia and Latvia with euro-pegged exchange rates tried cooling measures on their own without coordination. The European Banking Agency was created as a joint forum but still relies on voluntary understanding between national authorities from basic norms to resolution cases. It will now feature in the single supervisory mechanism outlined in June which puts the ECB in the lead under a common framework but leaves intervention a local responsibility.

The current blueprint in the absence of supranational oversight could be improved to better reflect Emerging European preferences, the document believes. Sub-regional arrangements such as a Baltic-Nordic group could facilitate practical dialogue and policy processes. An ECB “prudential council” should be formed with smaller country participation and financial sector tax, housing and other practices should remain nationally-determined. As a fiscal backstop through the ESM takes shape non-Eurozone members would not be eligible for recapitalization help to their competitive disadvantage. These “outs” should be able to join the treaty even without a roadmap to enter the single currency. More broadly “associate” status could be available in the union setup within a gamut of information-sharing and liquidity support possibilities. These partial adherents could decide to impose tougher countercyclical credit limits and delegate multinational group oversight to the continental body in view of wrenching administrative and capacity constraints.

China’s Currency Manipulation Mangle
2012 November 27 by admin

Posted in: Asia
As the US Treasury again postponed findings and the IMF changed its assessment to slightly undervalued, China’s currency regime was prominent in the US presidential campaign with Republican candidate Romney’s charge of manipulation as both the yuan and Hong Kong dollar resumed appreciation toward their upper bands. Capital flight abated on the mainland as state banks were once more net foreign exchange sellers, and yields on renimbi-denominated HK bonds leveled after a 300 basis point leap. The turnaround accompanied a solid Q3 official economic report prior to the 5-year Communist party congress charting a 7. 5 percent GDP rise on decent domestic and external figures including only modest home price decline. Core fixed asset investment was up 20 percent and retail sales were just behind at 15 percent on PMI almost at 50 and inflation under 2 percent. Ratings agencies weighed in with assurances of policy flexibility to avoid hard landing through fiscal stimulus and consumption incentives, especially in alternative energies like wind and solar encountering soft demand from industry and subsidy complaints from trading partners. The central bank has mounted record repo operations to ensure liquidity can be on-lent to smaller firms in recent months, and one-tenth of exports and one-quarter of FDI are now settled in renimbi, which has hit a decades-high against the greenback even though non-deliverable forwards anticipate another slippage bout. Local and regional governments that have already borrowed heavily have launched their own incentive and infrastructure programs as repayments loom and revenues slacken. The major copper producing province of Yunnan, for example, is offering discount loans to metals companies despite an 8. 5 percent forecast drop in use this year. The national planning body has cited raw materials overcapacity as well in cement, steel and other areas requiring less power supply increased only 5 percent in the latest quarter. World commodity values have fallen on waning Chinese appetite contributing to lower economic growth and corporate earnings outlooks across the BRICS universe.

Hong Kong banks have experienced share losses with one-quarter of their assets mainland-related, and the government’s tougher line toward property speculation and income inequality under its new leader. Social policy has entered the agenda with guaranteed minimum wage and pension proposals in contrast with the traditional lasses-faire approach, and the stock-exchange has mirrored the stance with stricter underwriting and anti-insider rules. Rural retirement schemes have been initiated across the border post-crisis, but portfolios are confined to low-return bank deposits and pools have reportedly been diverted for a variety of other purposes. Many stock market investors argue that a developed private pension pillar could offset retail-driven volatility, as the offshore center otherwise girds for eventual currency change after another test of the upper 7. 75 to the US dollar peg bound, with the monetary authority deliberately manipulating the outcome through a parallel historic lens.

Bolivia’s Gritty High Altitude Ascent
2012 November 21 by admin

Posted in: Latin America/Caribbean
After almost a century’s absence Bolivia returned to the sovereign bond market with a clamored-for $500 million 10 year issue at a below 5 percent yield, despite the Morales government’s history of arbitrary nationalizations in line with enshrined statist economic policies. Before the operation Fitch had matched S&P’s credit rating with an upgrade to BB- on “strong external buffers” following official debt relief with the ratio at only 15 percent of GDP. On mining and hydrocarbon revenue economic growth will repeat at 5 percent this year on inflation as well of that sum. The IMF has noted rapid real estate and consumption increases which will further be aided by a recent 20 percent minimum wage hike. Fiscal and current account surpluses could disappear with commodity correction, and business and competitive performance is at the bottom of world rankings. Fuel subsidies are a drag and expropriation compensation will also weigh on future spending. The central bank has emerged as a major company and project funding source with approval to lend $5 billion, or 40 percent of net international reserves, at 1 percent for 20 years. The local currency exposure could result in quasi-fiscal losses and complicate efforts to maintain the crawling peg exchange rate regime. With high bank reserve requirements dollarization has dropped to one-third the system, but private and smaller borrowers still face limited access. At the same time the bond road show was launched in the US and Europe, oil and gas monopoly YPFB opened 30 exploration tracts to worldwide bidding as a new joint venture code is prepared. As with his Andean counterparts in Ecuador and Venezuela President Morales is seeking additional term momentum despite regular tiffs with opposition parties and indigenous groups. Venezuela’s external debt coupon in contrast is almost 10 percent while Ecuador’s willingness to pay default removed it from mainstream securities indices and commercial facilities have since been available only from the Chinese. Next February’s election will likely debate change in the dollar arrangement under exporter and foreign partner pressure, despite continued reliance on US remittances.

Neighboring Uruguay, which has also enjoyed sudden investor popularity, has benefited from a flexible currency “shock absorber” with a capital inflow surge, according to the IMF’s November Article IV report. Despite appreciation against the Argentine and Brazilian units the central bank there raised interest rates as food and wage inflation continues to spiral. Temporary price controls have been imposed on consumer items in an effort to return to the target range amid predicted 3-4 percent GDP growth. Although an investment-grade rating was awarded earlier this year doubts linger over achieving a mid-decade public debt-output ratio of 45 percent. The state electricity company and mainstay agricultural producers regularly suffer from drought and that condition could resume for future fixed-income allocation, the review implies.



Global Financial Stability’s Local Debt Ladle
2012 November 21 by admin

Posted in: General Emerging Markets
The IMF’s October Global Financial Stability Report cited higher emerging market risks in its global “heat map,” alongside lingering dollar-access and European banking constraints on credit and the real economy as it calculated domestic bond resilience to foreign investor outflow. The compilation cited systemic blockage in cross-border project, syndicated and trade lines, with the exception of Asia where Chinese and Japanese lenders have stepped in, and underscored the core-periphery split in the Eurozone with wider borrowing spreads and household and corporate deposit flight in Mediterranean members. The estimate for near-term regional bank deleveraging was raised despite the declaration of ECB bond-buying help as asset quality continues to deteriorate with regulation now to be reinforced by fuller union. National and cross-border exposure has shrunk for both advanced and developing countries as non-strategic businesses and subsidiaries were sold in preparation for greater separation between the loan and securities sides in the traditional universal model. Non-residents held one-third of outstanding government bonds for a half-dozen EU issuers, although rollover risk was mitigated with 6-year plus average maturity. In the US the overseas share is 40 percent, and primary dealers have come under pressure from stricter inventory rules under the Dodd-Frank law which has already limited corporate trading. Central and Eastern Europe remains the “most vulnerable” to the continent’s crisis with their foreign currency portfolio concentrations and the NPL ratio above 10 percent in Bulgaria, Romania and Ukraine. Local bond volatility which again spiked last year has settled, but institutional investor bases are lacking in places like Hungary and Indonesia to cope with sudden international retreat. According to the Fund’s shock simulations, exit could range from 7 percent in Korea to 23 percent in Mexico. Pension funds and banks would be forced to absorb the slack and Malaysia and Poland may have room but other recipients are not as well-positioned.

Asia and Latin America have in turn experienced 15-percent annual credit growth the past five years in Brazil, China, Vietnam and elsewhere.