No More Learning

Secured transaction laws and collateral registries are increasingly common and credit reporting has extended beyond banks to wider commercial use within privacy limits. Twenty countries strengthened minority shareholder rights, and Morocco and Vietnam expanded transparency criteria while Sri Lanka barred conflict of interest and insider dealing. In Africa 17 French-speaking states adopted the OHADA liquidation framework, and Thailand adapted its reorganization code to meet small and midsize company needs.

Frontier markets with banking cleanup challenges, such as Tunisia which renewed its IMF program with a 4-year $3 billion facility. The financial-heavy stock exchange was flat on the MSCI Index through October despite recapitalization of two large public banks and new legislation. Private credit has sputtered with the NPL ratio above 15 percent, forcing borrowers to rely on direct central bank lines. Capital adequacy is reported at 12 percent, but tourism which accounts for one-quarter of problem portfolios, remains subdued on meager 1-2 percent GDP growth. Small companies have scant access despite the recent removal of interest rate caps and consolidation of hundreds of microfinance providers into several dozen. Security and social spending to address overlapping terror, refugee and unemployment threats have undercut efforts to restrain debt/GDP at 50 percent, but fiscal strategy contemplates civil service and fuel subsidy cutbacks. The current account deficit at 8 percent must also be reined in under the Fund arrangement, with reserve coverage now four months’ imports with bilateral and multilateral infusions. The central bank has refrained from intervention as capital account restrictions are gradually relaxed in preparation for a big end-November investment conference previously postponed with political shakeups and headline violence. Municipal elections approach in early 2017, after another Jasmine revolution anniversary with financial sector flowering signs still remote.





The Global Development Council’s Farewell Tour Treading
2016 November 2 by admin

Posted in: General Emerging Markets
The dozen-member White House Global Development Council issued a final progress report on recommendations to date and urged the next administration to sustain the advisory body and broad activity and policy direction. It praised the Obama “doing business differently” approach with data and non-traditional partner reliance, including a directive to apply behavioral science to programs. Consolidation of the government’s financing arms at OPIC, USAID, Treasury and other agencies into a single unit has “solid bipartisan support,” but not proceeded. Plans for OPIC’s multi-year appropriations and new staff and equity allocation capacity are also stuck. Social impact investing headway is limited, with a pilot bond under consideration at the grant-making Millennium Challenge Corporation, and “blended capital” models from public and private sources can be found in Latin American and African clean energy projects. Climate and food security are priorities with a focus on forest protection and sustainable agriculture, and technology and innovation have been promoted through dedicated labs and funds. In finance e-payments and inclusion are prominent with a push into women-owned and micro-enterprise. Measures to combat illicit flows and tax evasion have advanced through bilateral and multilateral channels, and the US has tried to lead on remittance cost and fossil fuel subsidy reduction. Humanitarian crisis response has been modernized with initiatives like the President’s private sector refugee call to action, but frameworks could be further overhauled as the UN’s updated Migrant Compact is set by end-decade.

Sub-Sahara Africa should be a future concentration, despite setbacks with country favorites and the “rising” narrative at risk with GDP growth dipping to 3 percent this year, according to the IMF. Ethiopia’s expansion has been double the pace, but a security forces crackdown against restive central regions has provoked international condemnation and travel warnings denting tourism which has increased 10 percent annually the past decade. The violence overshadowed opening of a $3. 5 billion railway line between Addis Ababa and next-door Djibouti. One-third of the population lives on less than $2 dollars a day, and with a declared state of emergency foreign investors in horticulture and other sectors have withdrawn. Mozambique has run into trouble on its $725 million “tuna bond” after previewing another large write-down with discovery of another $1. 5 billion in state-backed loans, bringing total debt/GDP above 125 percent. The IMF suspended its rescue program pending a thorough audit, and the government hired Lazard, which guided previous Greece and Ukraine operations, as its restructuring adviser. Bondholders including Allianz and Black Rock indicated they would seek to ring-fence future gas revenue as future collateral. They also threaten legal action against the arrangers of the secret loans, particularly Russia’s VTB. In the Central Africa franc zone Chad has turned against Exxon-Mobil, which produces half its oil, by levying a $75 billion local court fine for alleged export duty evasion. The company has appealed to the Arbitration Court in Paris, as critics accuse President Deby of diverting attention from his poor economic management and human rights record. The World Bank, which originally backed the project, has demurred on the dispute, but the latest governance index results from the Mo Ibrahim Foundation show the country at the bottom of the list among the continent’s resource rogues.

Saudi Arabia’s Wobbly Wellspring Tap
2016 October 26 by admin

Posted in: MENA
Saudi Arabia’s debut external sovereign bond size surpassed Argentina’s return by $1 billion at $17. 5 billion for this year’s and the historic record, and was four times oversubscribed for a 3. 25 percent yield, just 25 basis points above peer investment-grade rated Qatar. The 30-year sold more than the 10-year maturity with the paucity of positive return long-term global alternatives, and 5 billion was immediately funneled to local banks to relieve liquidity strains. Officials signaled on the road show a $10 billion annual borrowing program, as they presented a 200-page prospectus detailing the 70 year oil reserve supply and economic diversification and rationalization under the King’s next decade transformation strategy. The proceeds will only cover one-third of the current 15 percent of GDP budget deficit with petroleum prices still under the $60 per barrel break-even, and central bank holdings have fallen $100 billion the past year to cover the bill as plans to cut public sector wages and flagship infrastructure projects are slowly applied. The state oil behemoth Aramco may float shares in the medium-term under the modernization and transparency campaign, and foreign institutional participation will soon be expanded, but the stock market was relatively unmoved by the existing and prospective securities wave and remains at a discount to the MSCI average. The iShares ETF is off double-digits as investors complain that both companies and the government continue to lag on account and information disclosure. Domestic interest rates at 2 percent are almost triple the 2015 level and could rise further with Federal Reserve tweaking under the dollar currency peg. Gradual energy and utility subsidy adjustments have ratcheted inflation to 5 percent on 1 percent GDP growth.

UAE equities were ahead 5 percent on the MSCI index through mid-October, but banks are in a similar squeeze on hydrocarbon and fiscal retrenchment, with loans due to increase just 5 percent annually. Government deposits can contribute one-third of institution funding, and it has unveiled a big housing push to sustain momentum. The tougher climate sparked the First Gulf-National Bank merger, the largest consolidation since the 2008 crisis, which will still leave the ruling family in control. Bad loans are 5 percent of the total, and real estate and construction account for 30 percent of portfolios, and reported capital adequacy is 15 percent of assets, 3 percent over the minimum. The non-oil PMI manufacturing gauge is well over 50 and growth should come in around 2. 5 percent in 2016, but consumer sentiment is lackluster in advance of scheduled VAT tax introduction.

Qatar shares were marginally positive with its rating superiority over Saudi Arabia and 2022 FIFA World Cup preparation moving full steam for 3 percent growth. Organizers are portraying the event as a diversification showcase beyond sports into education, finance and culture. Debt issuance will slow in 2017 as the projected budget gap halves to 2 percent of GDP with a new airport tax bringing in revenue. A $9 billion Eurobond went smoothly in May but may not be repeated next year as domestic banks provide lines. Al-Jazeera TV closed its US operation and followed other state entities in slashing jobs, including museums which could not compete with athletic attractions.

Sovereign Debt Restructuring’s Trusted Travails
2016 October 26 by admin

Posted in: General Emerging Markets
The IIF’s Group of Trustees for an over decade-old debt workout voluntary code of conduct issued a mixed annual review of recent cases and related investor relations progress, while stressing new collective action clauses and other legal changes as main breakthrough channels. Argentina’s new government settled with most holdouts, but $2 billion in claims remain outstanding. Ukraine’s 2015 deal entailed a 20 percent principal haircut on $18 billion in Eurobonds and GDP-linked warrants as an offset, but Russia’s $3 billion holding, although classified as official by the IMF, is the subject of a London court dispute. Mozambique entered “selective default” on $800 million in state tuna company paper, which was exchanged for sovereign exposure in March this year on short notice without full consultation, according to the review. It was presented as a liability management exercise, but contained exit consents forcing action, and later official revealed additional undisclosed borrowing which caused bilateral and multilateral lenders to suspend lines. Venezuela’s oil monopoly has proposed a distressed swap in ratings agency views, with the currency “in free fall” and reported public debt at 80 percent of GDP, including over $30 billion owed China. Puerto Rico, a US commonwealth, reneged on $35 billion in repayments, and congressional legislation ordered a moratorium on hedge fund lawsuits and creation of a fiscal control board. Contract reforms, including on pari passu and creditor engagement, were promoted at the G20 summit in China. In the past two years model practice has been slow for the latter, which requires good-faith dialogue, steering committee recognition, and debtor legal fee coverage.

Proactive investor outreach and data distribution are also integral, and “enormous strides” are apparent, with almost half of 40 counties tracked with dedicated units for these purposes. In the latest overall rankings, Russia, Romania and Zambia moved up with more detailed information, contact availability and web-based communication. Ukraine benefited from external debt renegotiation as it translated sites into English, and Egypt’s score rose with forward-looking policy guidance and targeted lists. Out of a maximum 42 tally, Indonesia, Mexico, Turkey and Uruguay were in the top tier, followed by Brazil, Russia, South Africa and Poland in the second 35+ category. China became a subscriber to the IMF’s statistical standards over the period, and Nigeria released debt time series numbers. The Fund released its own working paper on investor relations priorities, citing positive outcomes for primary and secondary markets, risk appetite and maturing bond rollover with implementation. As the IIF update circulated, Mongolia previewed $1 billion in official support to skirt default on $1. 5 billion due on commercial instruments the next two years, more than current reserves. After winning parliamentary elections, the People’s Party revealed a budget deficit close to 20 percent of GDP despite austerity steps, as major mining projects ramp up including the next phase of the copper-gold OYU Tolgoi venture. Reduced capital and social spending aims to half the budget gap, and growth is forecast at 3 percent in 2017. Bilateral Asian creditors are major participants in the rescue, with China’s ties through the Development Bank and One Belt One Road platform matching a corridor plan with Russia to build on rival mistrust.

Venezuela’s Stubborn Self-Service Station
2016 October 20 by admin

Posted in: Latin America/Caribbean
Venezuela’s state oil company PDVSA came up empty in initial efforts to attain minimal 50 percent debt swap acceptance, despite higher yields in exchange for maturity extension, as creditors questioned the reliability of US Citgo gas station collateral again pledged to close the deal after issuance last year. Arbitration claims have also been filed against the assets serving to block agreement, as equity holders are likewise disturbed they would rank behind creditors in the new arrangement. Prices had lurched to 80 cents to the dollar before the failure, which may prompt further term enhancement for the $5 billion operation. At a ceremony marking Colombia’s peace accord with FARC rebels later rejected by referendum, President Maduro met with US Secretary of State Kerry but continued to foreclose the possibility of turning to the IMF or other “imperialist” institutions for help. He is in office until 2019, and the captive courts have not authorized signatures for a recall vote and stripped the opposition party-dominated parliament of budget powers. The private sector formal foreign exchange rate was devalued, but dollars are still scarce, as 800 percent inflation is reported and staple goods are only available on the black market aided by reopening of neighbor borders. The President’s approval rating is just 20 percent, and the cabinet is replete with military officers without appetite for takeover or large scale arrests so far while keeping their distance from leading civilians. Groups continue to return from advising and staffing the security forces in Cuba, where normalization with Washington took another step with easing of personal and business travel and banking and export rules within the confines of the decades-old embargo. President Obama before leaving the post released a broad policy directive designed to establish a bilateral relations foundation into the next administration. It cited increased private sector ties in agriculture, health and technology as a theme, and regulatory progress eliminating Havana’s penalties on dollar conversion. The dual exchange rate system and state monopolies persist, and the government remains in default on pre-revolution debt despite relief granted by other bilateral creditors. It has not applied for readmission to the Bretton Woods institutions, although Cuban economists have participated in research and events incorporated in the work agenda.

The island hosted Colombia’s guerilla negotiations, as the demobilization pact was defeated by a whisker in October’s plebiscite. Stakeholders went back to the table to forge compromise provisions that could win endorsement, but the political jolt was another setback for the sovereign rating already on negative outlook. A truckers strike could gap GDP growth at 2 percent, and inflation is far from the 3 percent target with the benchmark interest rate near 8 percent. President Santos, who got the Nobel peace prize for his effort, had planned to pivot to fiscal reform passage post-referendum with the deficit at 4 percent of GDP. Personal income and consumption tax increases are in the mix, along with simplification and loophole closure, but the working coalition in Congress has turned shakier. Andean observers betting on changes are now looking to Peru, where equities are outperforming as the MSCI Latin America winner and main tax goal is to collect informal money escaping the system to date but also denying citizens their social service fill.

Development Finance Institutions’ Muddled Model
2016 October 20 by admin

Posted in: IFIs
As OPIC in the US and other long-established bilateral development finance specialists look to revamp their missions in the face of new global competitors and issue-business challenges, a comprehensive study by Washington and London think tanks traces the broad history and recommends future activity and policy concentration. Their combined commitments were $70 billion as of 2014, half of total overseas direct aid, and they focus on investment support in low and middle-income economies rather than broad anti-poverty and sustainability goals. Tools encompass a range of loan guarantees, equity and insurance and outside fund manager engagement. Blended instruments with pure private sector funding are increasingly popular, and may be well-suited for big regional, energy and environmental projects, according to the authors. However executives in charge tend to focus on technical deal-making instead of larger issues and themes often inviting disconnect with traditional assistance agencies. The 2015 Financing for Development conference in Addis Ababa emphasized the importance of FDI risk reduction mechanisms, especially for marginalized fragile states. Local capital markets where they exist are often shallow and spurn small and midsize firm needs. In 2015 European DFIs had a total portfolio of $35 billion, and both OPIC and the World Bank’s IFC arm each mobilized $20 billion. China’s policy banks had outstanding credit of $685 billion, and Brazil’s state development lender’s was $275 billion. The new BRICS bank will extend and consolidate these efforts, along with the infrastructure focused AIIB based in Beijing with extra-regional shareholders. Europe’s providers have quantified their impact by citing creation of 4 million jobs and $10 billion in local tax revenue and participation must always meet the “additionality” test, namely that transactions would not occur otherwise. Financial services, power and transport are among priority sectors, and Sub-Sahara Africa is a chief target region. The institutions are often called upon to spur innovations such as in women-run enterprises and to carry out urgent crisis relief such as in battling the Ebola virus or funding post-Arab Spring economic transition. Evidence suggests that this investment can be counter-cyclical, but poverty and environmental results are rarely measured explicitly even as these operations are responsible for achieving the 2030 Sustainable Development Goals.

The paper concludes that “core competencies” should continue, but advises a shift from micro to macro themes and greater transparency in approval and evaluation processes. Risk tolerance should rise along with endowed capital as many DFIs remain small, and failure lessons must be more widely shared for academic and practical purposes. Africa attention will expand in the near-term with commodity exporter strain as debt-GDP ratios in many countries exceed 40 percent. Nigeria, where oil contributes three-quarters of fiscal revenue, has reached out to these sources after naira devaluation for commercial backing without resort to a companion IMF adjustment program,, while Zambia post-election will tap both after tightening fiscal and monetary stances. Its new budget will present figures on an accrual basis as GDP growth should come in this year at 3 percent, and banks grapple with higher bad loan loads which could be mitigated by outside forms of copper-bottomed protection.

Emerging Market Investors’ Forlorn Faith Healing
2016 October 15 by admin

Posted in: General Emerging Markets
All major emerging market asset classes — debt, equity and currencies — led developed world counterparts through the third quarter, with European and Japanese stocks particular losers. The outperformers were the MSCI core share and GBI local currency bond indices in dollar terms, with respective 17 percent and 15 percent gains. External sovereign EMBI fixed-income also was up 15 percent, followed close behind by the CEMBI corporate at 12 percent. The currency gauge rose 7. 5 percent on universal recovery after 2015’s double-digit decline. Net foreign retail and institutional investor inflows through ETFs and dedicated mutual funds soared to USD 48. 9 billion for bonds and USD 11. 9 billion for stocks through the third quarter, according to data tracker EPFR. The former fled the USD 10 trillion zero and negative yield universe of advanced economy benchmark instruments, and the latter benefited from long-predicted global asset class rotation.

Beyond the relative return allocation rationale, portfolio managers cited modest GDP growth improvement to a 4 percent average on better domestic demand and commodity prices, with recession bottoming in BRIC members Brazil and Russia, India dominating the pack at 7 percent, and China’s 6. 5 percent target on track. Political and geopolitical fears seemed to recede as Turkey’s attempted military coup was quashed, Brazil’s President was formally impeached after the Rio Olympics, and Middle East and African countries negotiated IMF rescues amid conflict and election disturbance and credit rating downgrades. Asia and Latin America, with currency and commodity relief, were also in position to shift monetary course to easing, especially as credit expansion outside China moderated to single digits. These arguments are valid but thin in justifying more than tactical exposure, regardless of year end central bank moves in the US, Europe and Japan. Developing market sentiment is brighter in comparative context, but durable commitment awaits deeper policy and practical transformations to reinvigorate a sweeping case that can update the golden era of previous decades.

Economic healing is tentative with the manufacturing output PMI barely above 50, and exports flat with world trade growth just 1 percent, according to the latest WTO estimate. In half of emerging markets, real interest rates are negative, deterring savings mobilization. Global oil price stability hinges on OPEC’s recent production freeze agreement, as the cartel remains split diplomatically between Saudi Arabia and Iran, and non-OPEC countries are free to ramp up supply. Private sector debt to companies and households, mainly through domestic commercial banks, is now twice the government load at 120 percent of GDP. It will remain a drag, potentially inviting crisis as bad loans also spike, the BIS and big investment houses continue to point out. IMF programs initially boosted confidence, but have since been delayed or unraveled in Ukraine and Mozambique, while Mongolia and Zambia have hesitated with negotiations.

Corporate high-yield bond defaults are already at 4 percent of the total, and although Brazil’s Petrobras with the largest amount outstanding won a reprieve with new state help, the imminent $7 billion restructuring of Venezuela’s PDVSA raises caution flags, especially as CEMBI spreads near a record low. The annual issuance forecast has been hiked from $200 billion to $300 billion with the wide open window, portending a glut. Sovereign bonds are likewise a crowded position with the EMBI spread over Treasuries in the 325 basis point range, and new issuance pouring in from Argentina and the Gulf. Local market yields have dropped to 6 percent from 7 percent-plus previously. Mexican peso and South African rand-denominated instruments have swung wildly as proxies for risk appetite, and Indian rupee ones are suddenly in the top three most popular despite foreign investment quotas, according to trade association EMTA’s quarterly survey. On equities, the valuation discount with developed world counterparts has narrowed but earnings growth is often absent to scarcely positive, as price-earnings ratios in Asian markets in particular drift to frothy 20 times levels.

On the mainstream EMBI, Venezuela was the top gainer at 55 percent as investors bet possible future presidential recall will overturn socialist direction, even as its stock market was removed long ago from the MSCI counterpart due to capital controls. On that gauge in Asia, China’s “A” shares were a notable exception to the regional upswing with a 10 percent loss through the third quarter. The renimbi entered the IMF’s Special Drawing Right with a 10 percent, weight but the Fund in a report otherwise criticized the pace of banking system and state enterprise cleanup. Despite the target headline growth, the private sector Beige Book reading of thousands of smaller firms showed a retail sales and services slump. Mortgage lending took half of new credit as authorities abandoned former curbs to stoke a short-term home price rise for consumer support. India reversed second quarter negative results in part with passage of national tax reform, but foreign investors will also face capital gains charges with the end of Mauritius domicile exemptions. Indonesia was ahead 25 percent with anti-corruption and pro-business Finance Minister Sri Mulyani reprising her tenure, but mining companies like Newmont exited, citing chronic regulatory burdens.

Latin America was the top MSCI region, and Brazil the core roster overall leader (+ 60 percent) on across the board financial asset bounce from 2015’s route, with economic downturn, interest rate upturn, and political upheaval cycles in concluding stages. However company defaults continued to cascade as new central bank officials tried to reassure about state and private lender health. Peru (+50 percent) was in second place, as former investment banker Pedro Pablo Kucysknsi became President on solid growth and inflation data, along with wider fiscal and current account deficits. However contrary to expectation, he signaled a hard line in a US bondholder dispute held over from previous administrations which was referred to arbitration under the bilateral free trade agreement. Colombia (+30 percent) rallied on the breakthrough guerilla peace accord which was rejected after quarter-close in a referendum, while Mexico was the outlier, off 2 percent with a ratings outlook cut and prospective Trump Presidency commercial and migrant confrontation.

In Europe Russia (+30 percent) was the runaway winner with bargain single-digit P/E values and fading sanctions constraints despite cyber-attack allegations surrounding US elections, which also encouraged fresh corporate and sovereign debt placements. Hungary (+20 percent) recovered investment grade rating status and the government has taken control of the Budapest stock exchange with the intent to facilitate privatizations and small firm listings, although progress has been slow. The Czech Republic and Poland were both down 5 percent through end-September, with possible removal of the post-2008 currency peg in the former, and bank foreign exchange mortgage conversion and private pension confiscation threats in the latter.

Despite the past quarter’s pervasive rally, momentum could again stall toward year end across developing market asset categories on recognition that short-term relative appeal still leaves unresolved economic, political, financial sector and institutional-regulatory issues from the post-2000s boom decade. The 2013 Federal Reserve “taper tantrum” was not as much a reflection of abrupt rate hike concern as a window into overlooked vulnerabilities not just for the “fragile five” countries, and the next phase of anger management will require more profound work for affable disposition to prevail.

Asian Markets’ Thwarted Third Quarter Thrust (Asia Times)
2016 October 15 by admin

Posted in: Asia
Asian stock markets with the big exception of China’s A shares, down 10% on the MSCI index in dollar terms, were all positive though September, roughly in line with the 15% global composite increase. Indonesia and Pakistan were the top core and frontier universe gainers at 24 and 16 percent, respectively, as the region lagged Latin America in particular with close to double those advances. India reversed negative performance and Korea and Malaysia were up 15% and 2%, respectively, in dollar terms. Thailand preserved a near 20 percent upswing on constitutional changes, while political transition hurt the Philippines as foreign investor outflows accompanied President Duterte’s erratic debut. Fund flow data continue to show a large $20 billion net exodus from Asia due mainly to Chinese financial system and enterprise restructuring fears, but doubts also linger about neighbors’ leadership and economic policy direction that may resurface toward end-year as industrial world central bank liquidity lift is not as pronounced.

Chinese equities were unmoved by GDP growth on track toward the 6. 5% target, and currency stability ahead of October’s IMF Special Drawing Right entry. The Fund in a separate report pressed the urgency of commercial and shadow bank overhaul against the backdrop of “uncertain” economic transformation. The government created a $50 billion state firm reorganization fund to spur halting efforts, but allowed use for new overseas acquisitions as outward direct investment was $10 billion more than 2015’s $135 billion FDI total. The private sector Beige Book survey of thousands of smaller businesses revealed a retail sales and services slump as rebalancing is emphasized away from fixed investment and exports. Steel industry overcapacity was marginally reduced, honoring a pledge at September’s G-20 summit, with companies defaulting on and swapping existing bonds in the process.

Real estate is also experiencing a glut according to experts, but half of bank credit, still expanding at a near 15% annual clip, is now for mortgages, enabling a sudden home price rebound in 65 out of 70 cities. Policy banks received injections to support infrastructure projects that no longer attract normal funding, and local governments are again borrowing heavily with previous limits ignored. The central bank in its own form of quantitative easing continued to add record liquidity through repo operations, but ratings agencies and investment houses note it is trapped as the true bad loan level currently stands at 15-20 % of portfolios. They believe recapitalization is long overdue for the giant state lenders to cover the hole, and are not keen on Shanghai or Hong Kong offerings, as evidenced by Postal Bank’s lackluster debut on the latter exchange in September despite its $7. 5 billion size as this year’s leader.

India moved from mid-year loss to an 6 percent advance with foreign investor allocation at $7 billion, almost double 2015’s third quarter figure, despite the steep average price/earnings ratio approaching 20 times. September’s $900 million flotation by insurer ICICI Prudential Life was the biggest in years, and oversubscribed tenfold as the sector further opens to international ownership. The appointment of new central bank governor Patel and monetary policy committee members has gone smoothly, and they may soon cut interest rates with consumer inflation down to 5%. Reported 7% GDP growth outpaces China’s, and the current account deficit is under control. National goods and services tax victory revived the structural reform agenda, although closing the offshore Mauritius loophole will impose capital gains levies on short-term investment for the first time.

Indonesia has been the big economy favorite in 2016 after President Widodo’s early stumbles, as he installed business-friendly ministers and championed consecutive infrastructure and anti-bureaucratic initiatives. Finance Minister Sri Mulyani is back in the chair to oversee a tax amnesty program which has so far brought in one-quarter the $40 billion target. Second quarter growth was 5 percent on solid consumption, but bank credit was only up single-digits and longtime mining partners like Newmont will exit on royalty and regulatory concerns. Philippines stocks in contrast sold off in September to pare their year-to-date MSCI index increase to 6%, as President Duterte lashed out at political and economic critics, with the region on notice to revisit policy coherence or enthusiasm could fade with the liquidity tide.



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Good Corporate Governance’s Praise Premium
2016 October 6 by admin

Posted in: General Emerging Markets
The IMF’s October Global Financial Stability Report lauded stronger emerging economy corporate governance and investor protection practices in recent decades, as illustrated in country legislation and new firm-level indices to support the analysis. Better frameworks enhance stock market efficiency and shock resilience, and firm balance sheets show lower debt and default ratios, but disclosure, independence and minority rights progress continue to lag global norms. The review cites historical episodes where poor treatment differentiated performance, including the 1990 Asian financial crisis, the 2013 US Federal Reserve taper tantrum, and this summer’s Brexit vote. Insiders can misappropriate and misallocate assets and lack of transparency correlates with greater volatility, but G20 and OECD governance guidelines remain a distant goal across the developing world as a reflection of distinct legal and judicial systems. Even with statutes on the books enforcement is sporadic, and emerging markets tend toward a higher concentration of big, often family shareholders. Bad practice can harm liquidity and capital structures, as price discovery is blocked and leverage and short-term debt are favored, the study notes. Cross-border access and international accounting standard adoption are major reform catalysts but one-time issuance and unqualified auditors cannot spur lasting changes. The World Bank’s “Doing Business” reference ranks countries by a half-dozen protection and reporting measures, and original work draws from a survey of 600 listed companies in twenty-five markets. It finds better scores with equities also available as ADRs on US exchanges, and they also carry a valuation premium. Statistical regressions associate superiority with reduced information asymmetry and smoother trading, and less co-movement with a broad index. Outright crash risk is also slimmer, as is sensitivity to global turmoil as captured by the VIX benchmark. Earnings and solvency indicators mirror good company regimes, and are connected in particular to independent director presence. Despite advances, the Fund criticizes the absence of related party, beneficial ownership, and group structure provisions, and urges company law to expand board powers and split the chair and chief executive functions.

Codes were updated for Russia in 2014 and Malaysia in 2012, although the former has not been strictly enforced and the latter is voluntary. Brazil’s 2000 Novo Mercado tier was an earlier launch, and companies there have been major beneficiaries of this year’s MSCI leading 60 percent gain. Korea recently introduced new management compensation disclosure, and Morocco and Peru eased document requests. India and Kazakhstan stiffened conflict of interest rules, and Vietnam hiked director qualifications. Egypt and Lithuania banned subsidiaries from buying parent company shares, while China is an exception where pervasive state ownership is barrier to governance and restructuring strides, the report concludes. Less-integrated frontier markets have not assigned priority to the issue, which may account for the 2 percent loss on the MSCI composite through September while all other asset classes rallied.
Gulf exchanges were off double-digits and Africa was battered by 30 percent declines in Ghana and Nigeria. Pakistan was a winner with a 15 percent surge as the bourse may sell a stake to the Chinese, amid both public and private sector governance doubts with cool military-civilian government relations as the Taliban retakes cities in next-door Afghanistan.

China’s Yuan Entry Yawn
2016 October 6 by admin

Posted in: Asia
Chinese stocks were stuck at a double-digit loss as the currency barely budged on officially joining the IMF’s SDR basket in October, following a report pressing financial system overhaul and cautioning on “incomplete” economic transition. GDP growth is in line with the 6. 5 percent forecast as the Fund cited higher correlation between the RMB and Asian units. Commercial bank foreign exchange sales in August were the lowest in a year, as 2015 outward direct investment was $10 billion more than the $135 billion FDI total. The independent private sector Beige Book gauge surveying thousands of smaller firms confirmed retail and services slippage, as monthly fiscal spending continued at a pace double revenue. The government launched a $50 billion state enterprise restructuring fund, with initial capital from big telecoms and oil companies that could be used for overseas acquisitions. Toll road debt has ballooned with 80 percent of income needed to repay loans, according to the Transport Ministry. Policy banks have been tapped to support projects unable to get normal funding, as Fitch Ratings puts the true NPL ratio in the 15-20 percent range. A separate brokerage tally has shadow financing at the same damage level, as credit increases at a near 15 percent annual clip in a chronic divergence with economic growth presaging crisis over the next three years, the BIS reiterated in its latest review. Household mortgage transactions have been the main driver, up 50 percent in a bid to stabilize the property sector. One third of urban dwellings may be vacant nationwide, but house prices are again rising in 65 out of 70 cities, with purchases reverting to no down payment. Developer offshore dollar bonds have sold easily, with $1. 5 billion in August issuance, as $7. 5 billion comes due in 2017. The central bank has injected record liquidity through repo auctions, as ratings agencies calculate the recapitalization hole as high as 20 percent of GDP. Local government vehicles are likewise active again with RMB 1 trillion in placements through September exceeding all of 2015, and provincial authorities have ordered resident banks to open the spigots to protect jobs.

Industrial profits rebounded 20 percent as of August, but steel groups have lagged on bond defaults and state-directed consolidation reflecting an overcapacity reduction pledge at the recent G-20 summit. Unlisted Dingbei, owned by the Liaoning government, was the latest to renege on repayment and state-run Guangxi Metals was liquidated. Giant Sinosteel completed a debt-equity swap for its $60 billion in obligations to 80 Chinese and foreign banks involving convertible bonds. Hong Kong’s exchange has been positive for the year and reacted well to the nascent industry shakeups and large $7. 5 billion Postal Bank offering anchored by cornerstone investors. However its share price fell after launch on weak retail and institutional appetite otherwise, as locals saved their powder for November’s scheduled Shenzhen connect activation. All other Asian exchanges were ahead through Q3, with Indonesia topping the core universe with a 20 percent gain. Pakistan was up by the same amount after rejoining that tier, despite renewed Kashmir squabbles with India, where excited foreign debt and equity inflows contrast with China’s lethargy.

The Middle East’s Blowout Bellicosity Bill
2016 September 28 by admin

Posted in: MENA
On the eve of the UN General Assembly’s special session on large refugee movements, the IMF updated its tally of MENA region civil and ISIS-related war costs, underscoring enduring conflict over one-quarter of the post-World War II period. Their underlying economic, political, social, demographic and religious causes are “deeply entrenched” and average episodes have lasted a decade. Currently 10 million refugees are in the area and mainly hosted in neighboring countries, with the Syria and Iraq influx swelling populations in Jordan and Lebanon and stretching budgets and infrastructure. Almost 2 million have reached Europe and 3 million are in Turkey and the immediate humanitarian emergency has morphed into a long-term development crisis requiring fresh donor funding and government policy reforms, according to the working paper. After four years of fighting Syria’s GDP is half the pre-war sum, inflation topped 300 percent and the currency is one-tenth the previous value, and growth has also been shaved 1 percent next door with housing expense skyrocketing in border zones. Total factor productivity has collapsed with the human capital toll in Syria alone at 6. 5 million displaced and 500,000 killed, with 50 percent unemployment and 20-years reduced life expectancy. The statistics from Iraq and Yemen are equally “dramatic,” with their respective poverty rates at 25 percent and 50 percent. In Lebanon informal labor force entry depressed wages and arrivals overwhelmed public services with only one-third of refugee children able to attend school. A Syrian think tank estimates physical damage near $150 billion, a multiple of 2010 GDP, and in Libya oil output plunged to one-quarter of capacity with shutdowns and blockades, leaving a 45 percent of GDP current account deficit from former surplus. Jordan’s exports to Europe have suffered, and crime and insecurity have spread throughout the region, and affected tourism in Egypt and Tunisia outside the immediate frontlines. Human traffickers operate large smuggling rings diverting border protection, and FDI has been unable to return to pre-Arab Spring levels. Financial sectors have been hollowed out with deposit runs, asset crashes and capital flight, and the Syrian bad loan ratio was already 35 percent as of the most recent 2013 figures.

Social cohesion and institutional quality measures have slipped with only small minorities “trusting” the political and economic systems in opinion surveys. Central banks and finance ministries have lost authority and tax and payments network control, and international banking practice has further eroded their capacity by severing suspect correspondent relationships. Fiscal deficits have “ballooned” to averages above 10 percent of GDP, and monetary policy has been forced to step into the breach with government financing. International reserves are almost exhausted in Yemen and were halved in Libya as a portion of imports. Even with peace agreements, history shows the conflict cycle often repeats in the near-term and debt distress and fragility linger, with recovery taking decades. State intervention in wartime circumstances is hard to unwind, and reintegrating refugees is slow with the tendency toward prolonged absence and desired resettlement abroad. Working rights and private sector strengthening are important pillars of successful strategy the World Bank and IMF plan to support with increased technical and concessional assistance, along with possible debt relief aid the area’s unrelieved misery.

Risk Diet’s Controlled Calorie Counting
2016 September 28 by admin

Posted in: General Emerging Markets
The main emerging market asset classes had double-digit gains through August, with the MSCI stock and GBI dollar-denominated indices up close to 20 percent, on massive fund redeployment from low and negative return industrial world assets and modestly improved economic data. Commodities and currencies joined the upswing on correction and political risk pauses, as central banks in the US, Europe and Japan signaled status quo monetary easing policies along with hesitation to deepen that direction. Average GDP growth of 3. 5 percent should be positive after inflation, which has improved with food price drops added to previous energy ones. In the BRICS these readings are brighter as Brazil and Russia look to exit and South Africa to avoid recession, while China’s deflation and CPI numbers stabilize and India benefits from a good monsoon harvest. In other large markets Korea has experienced global tech recovery, Turkey has entered a period of post-coup attempt relative calm, and Mexico is not so spooked by the trade prospect of a Trump US Presidential victory despite the candidate’s rough short meeting with President Pena Nieto which further dented popular approval. However in parallel with the mainstream universe healing second-tier representatives like Nigeria descended further into economic and financial crisis, as power and foreign exchange rationing continued to deter direct and portfolio investors. It was down almost 40 percent on the MSCI Index, dragging the frontier composite into loss. Chinese statistics show the 6. 5 percent growth target on track as solid background despite private investment falls and halting progress on industrial overcapacity and state enterprise slimming. Bank credit’s share of total financing has been steady and geared toward property sector revival. The monetary stance is neutral, while the fiscal one is expansionary, with this year’s deficit estimated at 10 percent of GDP, according to the IMF’s latest Article IV review. Other developing markets have less budget room, but with lower inflation rates may be cut incrementally in the major regions with a few exceptions.

Brazil has been the top rebounder across-the-board with a near 50 percent MSCI advance to date, as President Rousseff was formally impeached during the Rio Olympics and a caretaker business-friendly government was installed to focus on structural reform and fiscal discipline. A long-term cap on budget spending is unlikely without profound constitutional changes, but costly social security programs could be modified and utilities will be further opened to private concession. Former President Lula’s prosecution may invite more supporter street demonstrations, and executives at the state development bank BNDES have also been implicated in far-reaching bribery probes. Judicial investigation is also under the microscope in South Africa, where Finance Minister Gordhan is accused of misusing the Revenue Authority as a possible prelude to dismissal pressed by his ruling party leadership enemies, who want looser purse strings for public enterprises. The pressure has intensified since the African National Congress was battered by opposition groups in August local elections, as its national vote share was down 10 percent to a slight majority. In contrast hard cases such as Venezuela and Ukraine threaten additional chaos, as both may face presidential recall and debt restructuring, on continued local and overseas indigestion after promised anti-corruption and recession servings.

The Basel Committee’s Bruising Balance Sheet Shaft
2016 September 22 by admin

Posted in: Global Banking
Banking industry associations representing and working in emerging economies have intensified criticism of Basel Committee credit, trading and operating risk proposals as detrimental with their limited supplemental capital market reliance. The Institute for International Finance in a September paper singled out the standard approach replacing internal ratings system as overly rigid in its unintended “downstream impact “on trade finance, corporate borrowing and hedging, and infrastructure, although it also contains pro-active provisions on house loans and other areas which are beneficial. Export credit is estimated at $10 trillion annually and is low-risk as a collateralized, self-liquidating product, but the regulators’ so-called conversion factor drawn from external agency ratings may raise counterparty percent weightings by triple-digits, according to an International Chamber of Commerce study. Companies depend on banks rather than bond markets, which are thin and illiquid even for big countries like Brazil, Turkey, Mexico and India where the turnover ratio is barely 0. 1 percent. Foreign lenders have been steadily retrenching the past decade, with their share of total banking assets down to 15 percent from 25 percent at the peak. Borrowers outside Latin America “typically” lack external credit ratings and are thus subject to 100 percent set aside under the draft Basel formula, which also applies for the first time to subsidiaries of large consolidated groups with holdings over EUR 50 billion. Unhedged foreign currency facilities carry a further 50 percent charge without proof of revenue streams in that unit. Emerging market derivatives are more costly under the model since they are uncollateralized and require additional information technology outlays that may be prohibitive. Infrastructure as an asset class falls under the Specialized Lending category with “adverse treatment” that fails to account for individual transaction features and historically low default rates. Often official credit agencies offer guarantees and other risk mitigation and financing structures have ample equity and senior debt safety cushions, the IIF argues.

On sovereign bonds the G-20 has been debating separately a framework for GDP-linked instruments, which would allow developing economies to deleverage with public debt levels at their highest since the 1980s amid volatile and declining growth. The central banks of Argentina and Canada presented a joint review for the Hangzhou China summit, and Germany as next year’s host agreed to keep the idea on the agenda. The authors note as in Argentina’s case that “warrants” tied to output thresholds have been a sweetener in commercial restructurings, but a full-fledged risk-sharing bond has yet to be issued to reduce solvency crisis odds. Countries worry that the yield premium demanded will be too steep and not change overall sustainability, while traditional investors like pension funds face difficulty pricing the equity-like component and placing allocation within the existing spectrum. They may also insist on greater returns due to novelty and illiquidity despite the innovation’s potential value to global financial system functioning, as with recent legal breakthroughs on collective action clauses. Government national account measurement and reporting is another concern prominent in Argentina’s episode, and accuracy and frequency challenges may be referred to the IMF under an indicative term sheet under preparation at the Bank of England with public and private sector consultation. It should be simpler than warrant guidelines and have international and domestic law versions for balance sheet flexibility.

Central Asia’s Doubtful Dictated Outcomes
2016 September 22 by admin

Posted in: Asia
The undisclosed death and power vacuum left by Uzbekistan’s post-independence strongman Karimov upset sub-regional investors already wary about succession planning and economic drift, as the few available and illiquid financial market outlets shuddered in response. Kazakhstan’s MSCI frontier index result went negative, although President Nazarbaev may be grooming his daughter to take over after naming her deputy prime minister, and a slew of younger officials who served over decades in power jockey for position. GDP growth was barely positive in the first half, with agriculture a lone bright spot up 3 percent on overseas sales including to post-sanctions Iran. The banking system is still in trouble almost a decade after crisis forced external bond defaults and state rescue, and the government has turned to the World Bank and Asian Development Bank for cleanup aid and technical assistance. It has returned to sovereign bond issuance with an emphasis on Islamic buyer diversification through sukuk placement, and sharia-friendly financial services are a linchpin of the new Astana offshore hub launched last year. As a strategic participant in China’s One Belt One Road natural resources and infrastructure outreach, the President was invited to the G-20 summit in Hangzhou but reaffirmed his friendship with Russian counterpart Putin, as the two countries are joined in the Eurasia Economic Union with Belarus. There President Lukashenko, who released jailed opponents after the EU relaxed trade restrictions, imposed a September deadline for his ministers to develop fresh foreign investor overtures, but progress has been minimal. The IMF is in talks on another program, but insists on genuine privatization rather than the halting asset redeployment which has not generated revenue or boosted productivity in the past. A Russian fund infusion staved off balance of payments and currency crunches earlier this year, but Moscow has indicated additional help may be difficult with its own recession and international reserve pressures.

Azerbaijan’s foreign bond reeled amid rumors of a third devaluation as bank hard currency demand continues to overwhelm the $30 billion sovereign wealth fund. The economy will shrink 3 percent this year, according to the IMF, as $5 billion is sought from Western development lenders for the Southern Gas pipeline, which will ship directly from the Caspian Sea into Europe. President Aliev has freed imprisoned political and media figures to allay human rights criticism, and has expressed willingness in observing reporting requirements under the Extractive Industries Transparency Initiative. He hired consulting giant McKinsey to prepare a long-term competitive strategy, and the US Secretary of State and EBRD head praised these moves in separate visits. The corruption-ridden customs process has been overhauled, but state banks are still in trouble from fraud and mismanagement. The once-pegged manat is on a path toward 2 per dollar, but authorities insist a crash and IMF resort will be avoided, unlike in nearby Mongolia, where the tugrik fell 10 percent in a month and the benchmark interest rate was hiked 5 percent to 15 percent in desperate defense. A Fund delegation arrived in August to find the budget deficit exploding to almost 20 percent of GDP even after spending restraint, as $1. 7 billion in medium-term commercial debt repayments top reserves’ dictated space.



The BIS’ Overturned Currency Turnover
2016 September 14 by admin

Posted in: Currency Markets
The Bank for International Settlements’ triennial foreign exchange and interest rate derivative surveys underscored increased emerging market trading shares largely at the expense of the euro and yen with continued dollar dominance. For twenty years the Basel-based organization has compiles these statistics and the latest effort drew on 50 central banks assembling data from over 1000 commercial banks and institutional dealers. Daily currency turnover was $5. 1 trillion, down from $5. 4 trillion in 2013, but when adjusted for dollar strengthening it rose 5 percent. The greenback was again on one side of the trade almost 90 percent of the time, while the euro dropped to 30 percent from ten points higher in 2010 due to the Eurozone debt crisis. The yen also slipped to 22 percent and the Aussie dollar and Swiss franc also slipped 1 percent for 5 percent range chunks. Emerging economies’ rise was “significant,” as the Chinese renimbi replaced the Mexican peso as the leader with $200 billion in daily activity and doubled its global slice to 4 percent. The Russian ruble also dropped on the list to almost 20th place at 1 percent, while Asian currencies including the Korean won, Indian rupee and Thai baht improved, ranking between 15-25. Brazil’s real, Turkey’s lira, and South Africa’s rand were in the top twenty rung. The spot market declined 20 percent over the three-year period to $1. 7 trillion/day for one-third of volume, while swaps jumped 5 percent to $2. 5 trillion for almost half of trading, although the growth rate slowed from the 2010-13 25 percent clip. Outright forwards were the largest segment at $700 billion, while options shrank by one-quarter to $250 billion, and they tended toward longer one week to one year maturities. By counterparty non-bank dealers raised their portion to 40 percent, while non-reporting smaller and regional banks contributed 20 percent of turnover and institutional investors were involved in 15 percent of trades, particularly swaps. Hedge fund and bank proprietary arm participation was off 30 percent to $200 billion daily, reflecting business and regulatory retrenchment. By hub location the UK took almost 40 percent as of April 2016 before the Brexit vote, and the US was constant with 20 percent. Asia specifically Tokyo, Hong Kong and Singapore boosted intermediation from 15 percent to 20 percent of the aggregate, aided by Chinese Yuan focus.

The companion over-the-counter interest rate derivatives reading traced a daily uptick to $2. 7 trillion from the previous $2. 3 trillion, with the dollar supplanting the euro as the most popular currency. Countries with negative interest rate such as the Nordics had sharp falls, while sterling and the Australian and Canadian dollars jumped. Emerging market units gained, but the greenback’s surge over the timeframe “understated” the shift, with contracts spiking for the Mexican, Chilean and Colombian pesos and Hungary’s forint. Hong Kong and Singapore dollar transactions were also up, while Chinese renimbi, Indian rupee and Brazilian real engagement slipped double-digits. Swaps were the chief driver at 70 percent of business, and the US edged out the UK as the leading processor, each with around 40 percent shares. In Hong Kong and Singapore daily dealing exceeded Tokyo’s $55 billion, which slid 20 percent from 2013 on Abenomics’ long-term zero interest rate policy trying to topple deflation assumptions.



Colombia’s Rebellious Referendum Rumblings
2016 September 14 by admin

Posted in: Latin America/Caribbean
Colombian shares stayed ahead double-digits on the MSCI Index despite stagflation signs as the 4-year negotiation slog with FARC rebels was concluded, with a demobilization in exchange for rural development agreement to be scheduled for national plebiscite. The definitive text, following a June ceasefire, would end decades of civil war but is opposed by President Santos’ predecessor Uribe and his party with strong representation in parliament. The President’s opinion approval is just 20 percent as GDP growth limps along at 2 percent on almost 9 percent inflation, which may spur further monetary tightening. His elite background and lack of charisma also create distance from average voters, who must be convinced of the deal’s merits and the ability to afford generous disarmament payments. The fiscal deficit is already 4 percent of GDP with oil earnings decline, pending long-promised tax reforms such as a VAT hike which will dent the government’s popularity more ahead of the 2018 election cycle. External accounts are also in questionable shape, with the current account gap at 5 percent despite monthly trade balance improvement on sluggish commodity-related FDI. Labor and credit conditions have worsened recently, but Finance Minister Cardenas has insisted the corrections are cyclical and should soon run their course, and that referendum uncertainty should not inhibit domestic confidence and investment. However officials now warn of another security crisis as hundreds of thousands of Venezuelans pour across the border in search of basic provisions, with a spike in refugee status claims.

Food, medicine and power shortages and a court ruling that a recall vote on President Maduro could proceed with qualified signatures have prompted an army crackdown and coup rumors. State company employees listed on the petition will be summarily fired, and the regime will not relent on arrested opposition party leaders to allow participation in the removal effort. Oil monopoly PDVSA must repay $725 million on external bonds in August as executives openly explore swap operations to lighten the near-term load, including on Chinese debt. The economy is in depression and hyperinflation, with Q2 contraction estimated over 10 percent and the parallel exchange rate as an inflation proxy spinning toward 1000 bolivar/dollar versus the official 10 for unavailable essential goods. The year-end CPI increase is conservatively estimated at 500 percent in the absence of current statistics, and wealthy Venezuelans unable to park money offshore have reportedly switched to gold for asset preservation, mirroring the central bank’s previous reserve management strategy which left it illiquid. Investment banks have been in discussion on loans against gold collateral but worry that their book is otherwise compromised by potential sovereign and quasi-sovereign default or restructuring.

The Caracas meltdown has battered Cuba a year after embassies were reopened in Havana and Washington. Venezuela’s supplies half its energy on barter terms for Cuban medical and security services, and President Castro recently ordered a halt in non-essential spending with the crunch. Oil deliveries are down an estimated 20 percent and the economy may linger in recession through 2017. Power cuts would otherwise hit tourism, but the US rapprochement has sparked new demand. The President promises to maintain residential output for social calm and the operation of small private business in homes as a revolutionary concept.

Portugal’s Corked Post-Crisis Intentions
2016 September 7 by admin

Posted in: Europe
Portuguese bond yields topped 3 percent, as Canadian ratings firm DBRS cited “mounting pressures” for joining its three peers in investment-grade demotion at October’s next review. The downgrade would disqualify instruments from the ECB’s buying program without a waiver as in Greece’s case, and raise the specter of another rescue as Lisbon struggles with 1percent growth and banking sector cleanup with government debt at 130 percent of GDP as of last year. That level is triple the “BB” category average and corporate and mortgage credit at risk is near 15 percent of the total. At home milk and meat producers decry industry crises, while abroad exports were down 40 percent in the first half to leading partner Angola, which has turned to the IMF for oil collapse help. Barclays research puts bank recapitalization needs at EUR 7. 5 billion, and a deal for one-third that sum was announced for Caixa Geral de Depositos which targets EUR 1 billion from private investors. The lender lost EUR 200 million through mid-year and Brussels confirmed the package did not constitute banned state aid since it will occur “under market conditions,” although demand for the commercial subordinated debt tranche remains elusive. Lingering woes are in contrast with next-door Spain, where after “bad bank” property loan absorption the sector has revived on second quarter 0. 8 percent GDP growth, with consumer spending up 3. 5 percent and manufacturing investment ahead at double that pace. Government debt is equal to output at EUR 1 trillion, with the first confidence vote in the precarious PP-led party coalition depending on Socialist abstentions for support.

In Greece, where stocks fell 5 percent on the MSCI Index through August, the central bank pointed out that apartment prices dipped only 3 percent in the first half, the lowest plunge in five years. Private sector bank deposits were also steady at EUR 125 billion, and the state repaid EUR 1 billion in contract arrears in advance of the Syriza party congress. The extreme poverty rate is 15 percent with lingering recession and a 5 percent slide in tourism receipts amid the Mideast refugee crisis. Arrivals from France, Germany and Russia were off double-digits with Syrian war and terrorism fear spillover. Separately international economists have urged a boycott in response to criminal charges against the former head of the statistics agency for inflating budget deficit data. The official was a respected technocrat and the EU found figures were not manipulated in its own investigation. Italy has admitted over 400,000 boat refugees since 2014, and a devastating earthquake killing hundreds will add to budget and banking burdens in advance of a constitutional referendum, with the opposition 5-star movement tied with Prime Minister Renzi’s party in opinion polls. The EU-agreed fiscal target is under 2 percent of GDP, and the non-performing loan ratio has tripled since 2008 to 18 percent, and the country accounts for one-third the Eurozone total. Small-business uncollateralized exposure is steep, and major groups have shed Central Europe holdings to cover holes. Unicredit’s 40 percent $3. 5 billion stake in Poland’s Bank Pekao will likely be bought by state insurer PZU as authorities move to consolidate local control to safeguard political and economic positions.

Africa’s Capped Goodwill Deposits
2016 September 7 by admin

Posted in: Africa
As the US research group Freedom House reported that Africa’s number of democratic leaning countries was down to 60 percent, election-related political and economic jolts took their toll on MSCI frontier markets, which lagged the core universe fund flow and performance surge. Kenyan banks sold off steeply as President Kenyatta ahead of polls next year signed legislation to cap loan and deposit rates, over central bank and industry association protests. Maximum borrowing cost will be 4 percent above the benchmark rate, and savings accounts must yield at least 70 percent of that level. The banks’ lobby called the restrictions “populist and retrograde,” as it assembled a cheap credit facility to stave off the measure, but the President argued that with double-digit rate spreads sector return on equity was extreme for the region, and business and public opinion surveys reinforced his stance. Small and midsized firms in particular lack affordable terms, and a separate $650 million commercial-official European bank initiative, Arise, will launch in 2017 in Eastern and Southern Africa, as the IMF predicts Sub-Sahara GDP growth at just 1. 5 percent for the first per-capita income drop in decades. Zambian securities were battered and the future of Fund program discussion was in doubt after the opposition presidential candidate, a wealthy entrepreneur, contested results showing a razor-thin ruling party re-election victory. The dispute may be settled in court, but shops closed in preparation for trouble. The challenger, running a second time, campaigned on an anti-corruption and economic reform platform, with cabinet ministry elimination a centerpiece. Copper is two-thirds of exports and the currency has fallen 40 percent against the dollar the past two years with price reversal. The incumbent took the post after his predecessor’s death and early in his term conducted negotiations with the IMF, but agreement was missed over required subsidy cuts to slim the budget deficit and government debt. The media questioned another arrangement given the history of confrontation with Washington, and the main independent newspaper was shuttered over alleged overdue taxes, drawing criticism from international watchdogs.

In Zimbabwe MSCI losses mounted as demonstrations spread beyond army veterans to the general public, who faced off directly against security forces. New elections are not due for two years, but opposition parties have begun to debate joint strategy to force President Mugabe’s earlier departure as his age and health also may hasten transition. Longtime ZANU party loyalists have broken with the regime, and civil servants have not been paid for months with empty coffers. China will no longer bankroll abuses and management in exchange for natural resources, and reconciliation with the Bretton Woods development lenders has been slow under shareholder doubts and outstanding arrears. The IMF notes mixed progress under a staff-monitored agreement, but current reliable statistics are absent, and signature policies such as farm nationalization are anathema to deeper engagement. The indigenization law has been adapted and delayed to allow continued foreign majority ownership, and local-currency reintroduction did not pass the planning stage. South Africa had been an escape route but sentiment has turned against immigrants, and experts fear the worsening unrest could prompt military takeover to altogether erase competitive space.

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Private Equity’s Paused Penetrating Insights
2016 September 1 by admin

Posted in: General Emerging Markets
First half EMPEA statistics, collected by the Washington based private equity body in cooperation with country and regional counterparts, show sharp drops in funds raised and capital invested, at $15 billion and $13billion respectively, in comparison with 2015’s pace. The full year corresponding totals then were $48 billion and $32 billion, almost triple current figures. This year’s fundraising has increased 5 percent away from private equity to infrastructure and credit as separate asset classes, but it is less than one-tenth the US total as opposed to almost 20 percent last year. Emerging market investment is constant at 7 percent of the global sum, but penetration as a fraction of GDP is only one-quarter the US-UK’s and half of Israel’s for the best performer India at under 0. 4 percent. The ten other markets surveyed are all 0. 2 percent or below, led by Korea and South Africa, with Russia and Turkey at the bottom. Brazil, China, Poland and Sub-Sahara Africa are in the middle, while Indonesia and MENA are also laggards. The venture capital data suggest that such long-term illiquid allocation has not received the heavy sudden inflows as in public markets fleeing negative and negligible returns elsewhere. Traditional limited partners like big pension funds and insurers express concern about immediate balance sheet holes as well as the asset-liability mismatch over time that place a premium on higher yield and tradability, and also seek to reduce susceptibility to political shocks that have proliferated in major developing economies. They argue that hybrid offerings combining public and private equity and debt features may be a more viable medium-term model, and caution that as emerging world central banks consider their own quantitative easing programs purchasing securities the product landscape could be further constrained. China’s G-20 summit will emphasize possible member shifts from monetary to fiscal policy reliance, with infrastructure commitments assuming priority, but conventional loan and bond financing will be the preferred route. Small business credit access, high on the agenda under Turkey’s previous hosting, will be another topic where venture capital could be cited as a secondary contributor, but participants will focus on mainstream bank outreach.

On other themes, China’s outbound investment will come under the microscope after national security controversies around company takeover attempts in the US, UK and Australia, and criticism that Beijing does not offer reciprocal access. Experts have recommended the establishment of independent global panels to resolve clashes over portfolio and direct ownership stakes, which could be affiliated with the WTO as the main multilateral trade body.