No More Learning

GDP growth is 5 percent and daily power cuts have halved after completing an IMF program. On infrastructure a $1 billion road between Islamabad and Lahore has opened and Prime Minister Sharif has negotiated $40 billion in Chinese investment under the One Belt One Road scheme. Consumer goods listings have enjoyed a run, with multinationals like Nestle doubling sales and banks are in the process of more privatization. In the business capital Karachi kidnapping and terrorism incidents may have abated, and the army has claimed rebel suppression in the Federal Autonomous Areas unable to be independently verified. The Prime Minister and US President Trump reportedly have exchanged cordial phone calls, despite the latter’s fulminations against the political and commercial elite with the Sharif family a charter member.

Brazil’s Reconstructed Temptation Temerity
2017 March 25 by admin

Posted in: Latin America/Caribbean
Brazilian stocks continued at the front of the core universe and a $1 billon sovereign bond return was acclaimed at a lower than expected 5 percent yield, despite a poor last 2016 quarter bringing GDP contraction to almost 4 percent, and interim President Temer’s popular disapproval rating rivaling his ousted predecessor. Headline scandals also proliferated, with construction giant Odebecht now facing bribery charges and penalties across Latin America, with Peru seeking extradition of former President Toledo for questionable transactions in office. Local prosecutors are investigating hundreds of mayors suspected of corruption, including for deals around the Rio Olympics as the original Car Wash campaign probe drags on, with courts to determine whether the Rousseff-Temer election ticket should be retrospectively invalidated. The current government head waved off this risk and his unpopularity and went on a media blitz to affirm commitment to structural spending reforms, as reflected in legislation to tie discretionary appropriations to inflation increases over the next decade, and limit state pension and social security outlays out of kilter with global norms. The primary fiscal deficit was a record 2. 5 percent last year and public debt could soar to 90 percent of GDP by end-decade without program rollback. The currency has rebounded along with currencies from the previous trough and facilitated inflation reduction to 5 percent, and the central bank cut the benchmark 75 basis points at its latest meeting and is on track to slash it to single-digits over the coming months. The easing is share-positive and could spur flat corporate and consumer lending on both demand and supply constraints. The new director of development bank BNDES has concentrated on portfolio restructuring and clarified future direction as providing targeted support to justify its subsidy instead of an all-purpose backstop as in the past. FDI assistance is a priority as $80 billion continues to pour in annually to offset capital outflows and cap the current account gap at 1. 5 percent of GDP.

Argentina has been on its own 20 percent roll on the MSCI frontier index and President Macri and his Brazilian counterpart have met and set up commercial and diplomatic teams to revive the moribund trade pact Mercosur, after ejecting Venezuela from the group. The two countries have clashed on auto sector tariffs and the bloc maintains steep barriers against outside goods. The overall trade balance was in surplus in 2016 after a 2015 deficit, with agricultural harvests ample on commodity price recovery and peso collapse subduing imports. Growth has turned positive after last year’s recession and the new Finance Minister, after an early 2017 external bond encore, promises to redress the 4 percent of GDP fiscal gap with measure still protecting the poor. The central bank has kept interest rates around 25 percent with stubborn inflation in the aftermath of floating the peso. The President’s minority party hold in parliament could worsen in upcoming elections, but the opposition Peronists remain too divided for a blowout. One wild card is the possible candidacy of his predecessor Christina Fernandez, now under both criminal and civil proceedings for suspect currency and Iran dealings. The latter claimed the life of the former lead investigator in a shooting incident looking like suicide, amid scrutiny of the government’s self-inflicted policy wounds.

Russia’s Crossed Wire Winnowing
2017 March 19 by admin

Posted in: Europe
Russian shares languished at the bottom of the MSCI Europe pack into March as President Trump’s wiretapping allegations against his predecessor redoubled controversy over previous campaign connections acknowledged by senior officials and under investigation by the US Congress and law enforcement arms. The entanglement continued to raise questions about election interference and cyber-attacks against Washington and critical infrastructure, and sidetracked calls for Ukraine incursion sanctions easing as conflict also worsened there. The recession is over with the oil price again at $50/barrel and inflation may halve to 5 percent with ruble recovery, as the central bank holds rates and limits currency intervention. Single-digit valuations remain at a discount to emerging market peers, but foreign investors have turned wary of domestic legal and political risks alongside additional cross-border intrigue in Europe and the Middle East. In the region Kremlin associates were reportedly implicated in a coup attempt in Montenegro and a Moldova banking scandal unseating the government. Moscow may also demand harsher terms for another bailout of Belarus in the Eurasian Economic Union, after President Lukashenka’s IMF program overtures were spurned. Putin nemesis Navalny was arrested on fresh charges designed to prevent participation in next year’s presidential contest, but he plans to continue campaigning through detention. Human rights campaigners were further appalled by legislation to decriminalize spousal violence, and eyewitness accounts of civilian bombardment by Russian war jets in Syria, where Aleppo was retaken by Assad forces. With the post-2014 financial crisis ebbing state-owned giant Sberbank has revived earnings and the Kudrin structural reform blueprint, which received attention at its height, has faded into the background. Anti-corruption discontent has likewise dissipated, with news of Prime Minister Medvedev’s lavish spending while rejecting elderly pensioner pleas for a raise eliciting a shrug.

However rapprochement with Turkey, where equities have veered positive with a near 10 percent gain, has deepened in recent months, with a mutual pledge to quintuple bilateral trade to $100 billion, and establishment of a Turkish military buffer zone in Syria to battle ISIS and Kurdish rebels. A Russian company is building a nuclear plant, extending energy cooperation as half of Turkey’s natural gas imports are sourced from Moscow. President Erdogan’s sweeping arrests of business executives and government officials after last year’s failed coup has met with no protest, and the seizure of big companies for alleged Gulenist conspiracies has replicated the Kremlin model. Proposed constitutional revisions going to national referendum would allow the President terms to run until 2029 under expanded powers. Deputy Prime Simsek, sidelined as an economic reformer, admitted a short-term “mess” with the lira at a record low and meager growth, but urged investors to stay the course for political system overhaul. The central bank refuses to outright raise rates under presidential hectoring as the regime intends to consolidate large bank and corporate holdings in a sovereign wealth fund to increase economic control and leverage. With private borrowing external debt/GDP is 30 percent, and rollovers may not be as smooth with exchange rate and operating setbacks. Fitch stripped investment grade status in February with expectation of corporate restructuring volume despite the 3 percent headline bad loan number, and a temporary return to double digit inflation as the Islamic Party leadership doubles down on wiring popular dominance.

Kazakhstan’s Contrived Constitutional Corollary
2017 March 19 by admin

Posted in: Europe
Kazakh shares were up almost 30 percent to head the MSCI frontier list through February as President Nazarbaev proposed constitutional changes to decentralize power and chart a succession path, and the two biggest state banks were merged with a $6 billion infusion after the IMF called for “prompt” action in its Article IV report. The 75-year old leader announced 35 amendments that will transfer more authority to the cabinet, parliament and provincial bodies following working group consultations nationwide that spurred over 5000 submissions for post-independence charter improvement. The political transition roadmap was outlined as the country tries to balance its diplomatic and geographic position between China and Russia, and the Fund brightened the GDP growth and inflation forecasts to 2. 5 percent and 6. 5 percent within the target range respectively. The currency strengthened to 310/dollar in March, and exchange-listed privatizations, with major infrastructure and natural resource firms on the block, are designed to cut the non-oil fiscal deficit to 5 percent and official ownership control to 15 percent of GDP by end-decade. Growth last year was 1 percent with the oil price rebound and housing and small business support through a dedicated program to increase domestic demand. Banks remain a weak spot although dollarization has slowed to half the system, according to the central bank. Ratings agency Moody’s in a February survey cited near-term solvency risks with bad loans stuck near 40 percent of the total, and net interest income to stay low among the thirty competitors. Around 40 percent of non-performing assets are lodged at Halyk and Kazkommertsbank, and they will combine after the government agreed to absorb big problem lines, including outstanding credit to another rescued lender BTA, which defaulted on external bonds. Two small institutions got into trouble in recent months for non-payment and one lost its license as the IMF recommended more interventions and liquidations in the February review.

Ukraine rose 20 percent on the MSCI Index, despite renewed separatist fighting in the east and Russia’s lawsuit in London pressing for $3 billion bond repayment, as another $1 billion was to be released under the IMF arrangement following 5 percent last quarter growth. Trump administration views on the conflict have not been articulated despite expressed desire for warmer Moscow ties, although an oligarch close to former campaign chief Manafort was extradited from Austria to the US on bribery charges. Banking reform has been a clear triumph for the Poroshenko government with half the sector shut down after a comprehensive sweep. The central bank after initial delay took on the country’s wealthiest individual and seized the biggest participant Privatbank after finding a $5 billion capital hole from related-party transactions. Capital controls may be gradually lifted as rules were recently eased on foreign exchange trading. The NPL ratio is 30 percent, with domestic banks in the worst shape and Western and Russian-owned ones just bruised, but Sberbank’s portfolio worsened the past two years under dual crises. The headline capital adequacy number is 15 percent of assets, but masks wide differences in institution health. Profitability has not returned and large maturity mismatches endure with corporate and retail exposures. The parliament guaranteed all state bank deposits last year in a bid to restore confidence but not necessarily fiscal health which is also in the Fund rehabilitation orders.



Mongolia Struggles With Financial Instability (Asia Times)
2017 March 13 by admin

Posted in: Asia
Mongolian shares rose 4 percent into March according to Bloomberg’s top company index, after the IMF extended another multi-year bailout for $440 million which can unlock an immediate additional $3 billion from bilateral and multilateral partners. China, which receives 90% of mineral exports, will bolster a $2 billion currency swap as part of the package, coming just five years after expiration of 2009’s post-crisis program. With its 85% of GDP public debt, the country faced imminent default on an almost $600 million Development Bank external bond repayment due this month, as headline mining ventures unraveled over investor commercial disputes and alleged corruption and political favoritism. The new government in power led by the Mongolian People’s Party has promised to restore economic stability and creditworthiness through the Fund plan and more business-friendly policies, but protracted banking system and fiscal cleanups may exhaust multinational company and average citizen patience.

The Fund announcement described long-term agriculture and tourism diversification scope alongside natural resource wealth, but criticized “ineffective” spending designed to offset commodity price and foreign direct investment collapse. GDP growth “stagnated” at 1% in 2016, with high debt and low international reserves, which dipped to $1 billion or four months imports, in its wake. The currency lost one-quarter its value against the dollar, and a diplomatic spat with Beijing over hosting the Dalai Lama resulted in administrative and tariff penalties at year-end. The population went into the harsh winter with livestock under further claim as officials requested donations to help pay off overseas obligations. Nature was unusually unkind as disease ravaged rare antelope and drew appeals from global conservation groups.

In the mining sector, which accounts for one-quarter of output, the long impasse was ended in principle over royalties and management control at copper venture Oyu Tolgoi, operated by cross-border giant Rio Tinto. However the timetable for the project’s second phase has slipped, and private funding initially secured may have to be renegotiated with rising world interest rates. The fate of a $400 million sale of a Russian stake in state company Erdenet to a politically-connected Mongolian investor by the previous government is even more precarious. The parliament annulled the deal in February and called for renationalization amid charges the specialist Trade Development may have been an illegal hidden backer. President Elbegdorj complained the action would scare away foreign capital, but acknowledged the need to pursue investigations.

The financial system has been a shambles since independence starting with the central bank, which has been euphemistically engaged in “quasi-fiscal” activities including recent support for $800 million in cheap mortgage loans which had sustained household consumption. The Development Bank DBM, which provides one-quarter of total credit, carries an unconditional sovereign guarantee for its 2012 external bond as ratings agencies assign the issuers near-default status. The Bank’s former chief executive was arrested last year for abuse of the proceeds, and the latest Fund arrangement mandates a split between the government and lender, which is be run commercially according to a new law. A separate statute will overhaul the central bank’s governance and enforcement powers, and it is responsible for overseeing recapitalization and restructuring and shoring up the deposit insurance scheme after a comprehensive industry assessment.

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

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

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

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

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

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



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



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



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

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

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

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

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

Iran’s Goaded Guardian Grimace
2017 March 5 by admin

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

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

Greece’s Explosive Expulsion Exclamation
2017 February 27 by admin

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

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

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

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

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

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Egypt’s Frayed Fraternal Bonds
2017 February 20 by admin

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

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

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

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

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

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

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

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



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

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

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





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

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

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

China’s Protectionist Wave Bashing
2017 February 6 by admin

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

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

Mozambique’s Choppy Fishing Expedition
2017 January 29 by admin

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

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

Trump Tremors’ Makeover Mobilization
2017 January 29 by admin

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

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

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

Turkey’s Nightclub Spotlight Spleen
2017 January 23 by admin

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



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



Intelligence Networks’ Gauzy Future Gaze
2017 January 23 by admin

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

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

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Argentina’s Unforgiving Reputation Remake
2017 January 16 by admin

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

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

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

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