No More Learning

With the Asian Infrastructure Bank founding the challenge is more direct to the Bretton Woods institutions as both sides reassess basic foundations.

Indonesia’s Retrograde Red and White Blues
2014 November 6 by admin

Posted in: Asia
Indonesia tried to keep double digit share gains and one-third foreign ownership of local debt as President Jokowi took office after his opponent’s “red and white” coalition with legislative control moved to annul post-Suharto era electoral decentralization. The change would place appointment power with regional councils dominated by the parties, and outgoing President Yudhoyono proclaimed his “disappointment” with the bill which must be voted again to take effect as democracy activists launched protests. The new chief executive was relatively unperturbed by the move and vowed to appeal directly to the citizenry as he pointed out his minority political backing as mayor of Solo and Jakarta. His cabinet slate was also delayed by pending clearance from the anti-corruption body, but was presented to initial applause with technocrats in key economic posts. Other ministers came from his PDI-P party still dominated by former presidential contender Megawati. Lower oil prices have pared the fuel subsidy budget cost but the issue will be tackled as an immediate priority along with FDI treatment after the arrest of several mining company executives for alleged abuses. Jokowi will attend November summits in the region as questions hang over his lack of international experience. His hands-on style promises visible early administrative and infrastructure progress and more attention to the 40 percent poor population. The current account deficit remains stuck at 3 percent of GDP and relies disproportionately on portfolio inflows for coverage as the rupiah hovers around 12000/dollar. The central bank continues incrementally tighter money with credit growth down to 15 percent and a cap just imposed on premium deposit rates at large banks to divert liquidity to smaller competitors. The loan-deposit ratio is close to 100 percent but with growth slowing to 5 percent consumer and company bad assets are expected to rise.

That measure at 110 percent has started to raise financial stability concerns in Thailand despite the stock market’s 15 percent MSCI increase as the central bank is likely to stay on hold with tame global food and energy prices. Households borrowing heavily under populist schemes before the military takeover may be overextended and corporate bond issuance has spiked to 20 percent of GDP with low rates amid flat internal and external sales under the junta’s erratic policy direction. While infrastructure spending has been partially unblocked interim officials have suggested new wealth and property taxes although the army’s own business portfolio may be shielded. Corruption charges have surrounded government members after suspect asset declarations as the murder of British tourists at an island resort also raised negative attention. Malaysia has embarked on fiscal and monetary tightening as shares are off slightly through October. Gas and diesel costs were hiked and a VAT will be operational next year. The benchmark rate and bank lending standards were tweaked as gentle budget and credit landings are envisioned after the doomed airliner equivalents.

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Russia’s Depleted Energy Entanglements
2014 November 4 by admin

Posted in: Europe
Russian shares were down 25 percent despite P/E ratios toward 5 as lower oil prices and currency intervention dented the $400 billion reserve pile and gas talks with Ukraine again degenerated into payment ultimatums as the breakaway East held separate parliamentary elections from the rest of the country due to back President Poroshenko’s makeshift coalition. The ruble continued its 15 percent tumble past 40 to the dollar and ratings agencies added demotions that may shake investment-grade status. Domestic government bond auctions were scrapped on 10 percent yield demands as Rosneft raised its external repayment claim on official coffers to $50 billion. The economy may soon tip into recession as inflation heads toward 10 percent and may prompt central bank tightening. Sanctioned state banks have a reported $30 billion in international assets to meet obligations while new fund-raising is barred as a repo facility for the same amount was launched at home to remedy dollar shortages. Oligarchs under EU freeze orders have petitioned the European Court of Justice to invalidate them as the Kremlin has told pro-transparency organizations to sever Western ties. Officials denied consideration of capital controls or reversal of currency float intentions but allowed that geopolitical imperatives may prove decisive as President Putin repeated US culpability for the standoff. He angered German chancellor Merkel with intransigence during a brief encounter and raised ire in Italy with a courtesy call on disgraced former Prime Minister Berlusconi. In part to counter dependence on Gazprom imports EU members agreed to accelerate their green push to curb carbon emissions in preparation for the next global summit. Vulnerability was an issue in Bulgaria’s presidential contest won by previous incumbent Borisov, who will try to assemble a ruling patchwork to tackle the Bancorp collapse as an immediate priority. Heading into winter the compromise price with Kiev for past and future shipments remained intact but Moscow insisted on up-front coverage before the deal proceeds. The Baltic States relying most on supplies have experienced large stock market falls, with Estonia off 30 percent on the MSCI frontier index. They have accused Russia of border incidents and Lithuania’s track to euro entry and international bond issuance was interrupted by armed infiltration scares.

Ukrainian equities have gained 30 percent with the EMBI debt component flat as Naftogaz honored a USD 1. 5 billion October payment with Prime Minister Yatsenuk meeting with the IMF on expanded program potential with the war and lost output costs. Although public debt is likely at the 60 percent of GDP trigger threshold, Moscow has held back from accelerating the total due from its pre-transition bailout, as its banks may have blocking majorities on outstanding Eurobond placements. GDP will shrink 10 percent by year-end as the currency hits 13/dollar despite trading restrictions and intervention. The agricultural export ban added to counter-sanctions will cost $20 billion according to Kiev, which has already identified three banks for urgent recapitalization as steelmaker Metinvest with a CCC rating unveiled a distressed exchange in line with popular mood.

South Africa’s Trapped Power Pursuit
2014 November 4 by admin

Posted in: Africa
South African shares were flat as new finance ministry and central bank heads came on board and indicated harsher fiscal and monetary stances as state power company Eskom also on the cusp of ratings downgrade received an emergency rand 20 billion injection. Minister Nene halved the growth forecast to 1. 5 percent with the budget deficit at 4 percent of GDP and consolidation a priority to avoid a medium-term debt “trap. ” The gap will be reduced to 2. 5 percent of GDP through spending freezes although tax rises may be the main strategy. He lamented structural lags in the labor market, energy and bureaucracy as the toll of the months-long platinum workers strike continued to hurt business sentiment. Civil servants have also demanded wage hikes at double current 6 percent inflation as the government threatens layoffs in response that will worsen 25 percent unemployment. The rand has tipped toward 12 to the dollar and although inflation has leveled central bank chief Kganyago is expected to tighten policy against exchange rate and price pressures. As a prominent deputy he was known for hawkishness and close ties to the ruling ANC party, which now faces centrifugal forces from within and outside as the rival Democratic Alliance gains diversity and credibility with mayoral posts and the Economic Freedom Fighters founded by dissident Malema draw supporters. The metalworkers union has withdrawn backing for the next election, as President Zuma contends with rumors of ill health and corruption and malfeasance charges from multiple episodes. His number two Ramaphosa is well-liked by the business community for his successful black economic empowerment deals but his political antenna and charisma are limited according to observers. The slower growth conforms to the IMF’s latest regional projection of 5 percent with commodity slowdown, disease outbreak and infrastructure defects, as both domestic and external African bonds were punished with the bad news combination in October. Ghana suspended local issuance and Uganda and Ethiopia indefinitely shelved international debuts. Kenya announced further tax-advantaged infrastructure bond floats to quell unease over President Kenyatta’s submission to The Hague International Court for human rights abuses. Nigeria was formally declared Ebola-free by the World Health Organization after physicians were infected from a Liberian traveler, but the Finance Minister admitted energy price weakness was hitting the currency and fiscal backstop ahead of elections.

The IMF visited Zimbabwe at the same time South Africa’s senior posts were reshuffled and agreed to extend the staff monitoring program through 2015 as shares were slightly negative on the MSCI frontier gauge. Mozambique’s presidential election was close but the post-independence dominant Frelimo candidate triumphed and promised to better manage hydrocarbon riches after numerous scandals and accumulated public debt at 50 percent of GDP. The head of another former guerrilla group was the main opponent and a third party emerged as a viable presence. Growth is again running at 8 percent as $50 billion in investment should arrive for gas discoveries which have caused tempers to flare among the bypassed poor.

OPEC’s Cranky Cartel Behavior
2014 October 30 by admin

Posted in: MENA
Mideast oil and financial markets gyrated as OPEC swing producer Saudi Arabia offered to add global capacity with prices well below its budget breakeven $100/barrel, the UAE projected diversification calm amid another bout of Dubai property fever and Iran and Iraq struggled to recover from geopolitical squeezes. Saudi stocks were up 15 percent through October on momentum from a big bank offering and imminent non-resident opening under strict parameters, as building and transport projects sustained an over 60 PMI reading. GDP growth should be 4 percent but the fiscal surplus will disappear into next year on government infrastructure and social spending. Increased defense outlays will come from participation in anti-ISIS airstrikes but such efforts can be funded easily from the estimated $750 billion in foreign assets. Banks are implementing Basel III guidelines which may be reinforced by stronger no-interest Islamic-style mandates. The local employment push which initially repatriated thousands of overseas workers has been stymied by the lack of skilled graduates, although female recruitment has yet to be considered outside niche industries. The UAE is clinging to its top core universe 30 percent gain post-elevation as private capital inflows often from nearby trouble spots should reach $40 billion in 2014, according to the IIF. A small emirate just initiated an external bond, and trade and tourism have been solid non-hydrocarbon contributors alongside property, where Dubai values rose 15 percent on an annual basis in September. Bank NPLs are down to single digits as they face new mortgage lending and sovereign debt restrictions. World Expo 2020 preparations have not been affected by lower oil prices or state company residual credit constraints as CDS spreads continue to drop to half the crisis height. Iran has returned to 1 percent growth on partial sanctions respite ahead of the November deadline for a final nuclear deal. Inflation has tumbled to 15 percent and the black market currency fix has stabilized around 30000/dollar. The outright lifting of international embargoes could raise oil output another 1 million barrels per day and revive cross-border funding, with Euromoney magazine recently carrying a headline feature on the possible bonanza. European and Asian companies have regularly visited Tehran the past few months and the stock exchange organized a London promotion. Iraq on the other hand will fall into recession with the ISIS damage to energy facilities and security as reserves also slip 20 percent to $60 billion with capital flight. The Shia-Sunni-Kurdish divides may finally splinter the country after that fate was contemplated and avoided following the US toppling of Saddam a decade ago.

Libya’s economic and political collapse with the absence of central authority has cut daily oil take to half a million barrels, and fiscal and current account deficits will exceed 25 percent of GDP. With sovereign wealth fund assets still unknown and unavailable as court cases are pressed against foreign advisers in London official reserve drawdown will continue until potential medium-term depletion to match post-Kaddafi revolutionary hopes.

Asia’s Dodged Currency Maneuvers
2014 October 30 by admin

Posted in: Asia
The US Treasury Department’s October report to Congress on currency manipulation again absolved major trade partners although in Asia especially they fall under “close monitoring. ” It noted further large reserve accumulation in the first half, with China’s “excessive” despite monthly moderation, as the US current account deficit was more than halved from the pre-crisis peak at 2. 3 percent of GDP and the dollar appreciated 7 percent against leading units. In real effective terms the renimbi depreciated the most after the March band widening and has since firmed. Investment continues to contribute half of output with private consumption at 35 percent although services are now the biggest industry component in rebalancing progress, according to Treasury’s International Affairs office. In the first six months the current account surplus was $100 billion or 2 percent of GDP, down from the 10 percent registered in 2007. Exchange rate adjustment will encourage domestic demand and damp financial system distortions, in particular the 20 percent bank reserve requirement to drain liquidity, Washington believes. At the July bilateral dialogue Beijing agreed to decrease intervention and publish operations in the future through the IMF’s reporting format. On a trade weighted basis the RMB is up 1 percent through Q3 against the dollar, and recent months’ intervention was “modest” in light of offsetting capital outflows, the study suggests. The reference rate remains tightly controlled but was down 1 percent so far this year. The Fund’s July Article IV survey pointed to 5-10 percent undervaluation and the G-20 has pressed for regular currency reserve and operation breakdowns in the interest of global cooperation and transparency. Japan has maintained a floating regime without intervention for three years, and despite the world’s number two reserve pile at $1. 2 trillion foreign asset purchase has been “ruled out” under Abenomics monetary policy. The yen has depreciated 25 percent versus the dollar since October 2012 and the current account surplus has almost disappeared with offshore production relocation. The free-trade TPP negotiations are stuck on agriculture issues but financial services reciprocity has not been a prominent source of friction unlike the past.

Korea echoed the G-20 vow not to target the exchange rate for competitive advantage and the central bank has spent around $35 billion through its reserve position and forward book on dollar buying and selling through September. The IMF classified most transactions as anti-appreciation and placed won undervaluation at 5 percent to support the 6. 5 percent of GDP current account surplus. Macro-prudential restrictions have curbed external borrowing but may also interfere with commercially- determined rates and officials should only participate in “disorderly” markets, Treasury urges. Taiwan’s current account bulge is twice Korea’s and its $425 billion in reserves are superfluous “by any metric” according to the survey. Private capital outflows were almost $30 billion in the first half on life insurer portfolio allocation abroad, and the local dollar has been flat against the greenback although the exception is to limit interference to “exceptional circumstances. ”

Islamic State’s Dam Breaking Currents
2014 October 27 by admin

Posted in: MENA
ISIS’ march through Iraq and Syria waylaid regional markets as the international community scrambled to mount humanitarian and military responses with fighting for key infrastructure and territory centered on Baghdad and the Turkish border. Mosul with its dam and oil facilities has descended into urban warfare as the military under a new government tries to regain control, with Prime Minister Abadi attempting to unit sectarian factions and militias against a common enemy with the budget already stretched from lower petroleum revenue. Banks have been looted in conflict zones with plans for privatization and financial market development on hold as thinly-traded external bond yields jump. Turkey’s share gains have almost been eliminated as President Erdogan is pressed to join the military coalition against the terror group as Kurds accuse him of neglect while thousands of refugees from the besieged neighbors continue to arrive in overcrowded camps. The budget strain has reduced the primary surplus to 0. 5 percent of GDP as growth will come in around 3 percent with the loss of export partners. The current account deficit should improve to 6 percent of GDP on diminished energy costs and consumer borrowing for import demand, but inflation is still at 9 percent mainly from lira depreciation with the central bank ready to intervene at the 2. 5/dollar level with monetary tightening off the table for political reasons. Lebanese shares remain up 5 percent on the MSCI Frontier index as soldiers were captured and killed by ISIS and rival parties continue to bicker over the next president. Bank deposit growth of 5 percent has enabled subscription to another recent international debt issue, and the dollar peg has been steady with expatriate infusions. Basel III capital and liquidity standard implementation is on course and minimal Syrian operations have been maintained where feasible. Tunisia has been a main source for Islamic State militants and the stock market is flat with 2-3 percent growth expected this year going into the first post-2011 open elections. The World Bank has produced research on the former Ben Ali regime’s economic stranglehold but also criticized the lack of competitive and skills reforms since which have embedded a low-wage Europe-dependent enclave in its view.

Egyptian equities have kept 25 percent gains as President El-Sisi has been able to justify a hard-line Muslim Brotherhood stance in light of Iraq-Syria events and subsidy cuts demanded by Gulf donors have won investor praise. The IMF will conduct an Article IV review and may also consider a $10-billion range loan when a pledging conference is convened in early 2015. GDP growth rose to 3 percent and the fiscal deficit is near single-digits as a portion of output. Reduced oil import expense should allow faster clearance of foreign supplier arrears and Suez Canal earnings have improved as a parallel waterway project was inaugurated with $8 billion in domestic bond subscriptions as the leadership tries to clean the previously splattered scroll.

Africa’s Oil Fire Singe
2014 October 27 by admin

Posted in: Africa
African securities were pounded by a combination of commodity price and global financial market jitters as oil fell toward $80/barrel and debt and equity fund outflows began to stall the frontier category according to industry sources. Nigerian stocks were off 20 percent as foreign investors with one-fifth of the market cut back with elections in several months and the Bonny Light crude premium eroding with the world supply glut and demand retrenchment. The Finance Minister repeated an Ebola-free message but her audience at the IMF-World Bank annual session doubted eradication as West African and US cases spread. President Jonathan is due for formal re-nomination in December as the main opposition party dissolves into factions. GDP growth was 6. 5 percent in the first half on single-digit inflation and the excess crude account and sovereign wealth fund have almost $6 billion on hand together as the Fund recommended higher savings to prepare for downturns. The 3 percent of GDP fiscal deficit will increase with election outlays and monetary liquidity will be injected at the same time with maturing bank Asset Management Company paper. The exchange rate has been allowed to breach the 155 naira/dollar corridor without official policy change as the central bank keeps its course through the February poll. International reserves have stayed around $40 billion or six months’ imports but authorities have recently cracked down on money transfer houses to curb volatility. Local debt performance has also turned negative as previous GBI-EM over-weights were abandoned on political and energy risks and portfolio rebalancing. Ghana’s external bond yields blew out to 8 percent as Fund talks on a program may drag into 2015 to tackle internal and external deficits above 10 percent of GDP. Oil production capacity is hindered along with the price reversal and growth may weaken to 4 percent this year under the additional overseas investor and visitor Ebola fright. Public debt has already triples since official relief to over 60 percent of GDP and wage and subsidy cuts are slated for an eventual IMF facility which the government claims will be a precautionary one. The equity market is at the bottom of the Sub-Saharan roster with a 30 percent loss and local bond players have been burned by currency access and central bank buying changes.

Zambia had acknowledged the need for Fund help earlier but its bond price sank too on copper tumult and backtracking that only enhanced monitoring through a Policy Support Instrument is warranted. The President fell ill during his New York visit for the UN General Assembly and the Vice President has absorbed his workload. The 7 percent growth target will be missed and the fiscal deficit will top 5 percent of GDP as a new mining tax regime is introduced. The companies concerned have already pushed back against its complexity and steeper rates as they press for over $500 million in VAT refunds. The currency has stabilized but reserve coverage remains tarnished with the metal move.

Greece’s Peripheral Center Stage Worry
2014 October 23 by admin

Posted in: Europe
Greek stocks were at the MSCI bottom with a 30 percent loss and bond yields retraced to 8 percent on IMF-EU program exit muddle in the wake of the coalition’s meager confidence vote win and European second-tier credit jitters. Prime Minister Samaras insists on no extension although a Fund precautionary facility is possible as his party backers believe commercial bond market return is set and outstanding bank recapitalization needs can be covered by a remaining backstop and private share offerings. To boost popularity ahead of a crucial vote for president early next year he froze and cut several taxes with the primary budget surplus in hand and GDP growth positive for the first time since the crisis. Public sector employment was slashed 25 percent over the period and “Doing Business” rankings rose with modest privatization due to accelerate in a EUR 20 billion effort through end-decade. The current account is in surplus on tourism revival and reduced debt service although the gross number remains unsustainable at over 170 percent of GDP. Official holders have assumed almost 90 percent of the EUR 300 billion owed, with a maturity profile of 17 years at minimal interest. These partners and Germany in particular have resisted further relief and demand a monitoring process as the formal Troika checkups end. For them Portugal is a cautionary tale as graduation was complicated by the Banco Espirito Santo collapse with public debt set to rise to 130 percent of GDP. Yields have not backed up in the same fashion but output slack will be huge over the near term as young workers have migrated to Brazil and Angola. Iberian commercial links with Spain could also backfire as a proposed Catalonia independence referendum is debated after Scotland’s UK breakaway attempt. Slovenia avoided a rescue and MSCI performance is negative as the effects of the large fiscal and banking system adjustments undertaken with EU cohesion funds are felt. Fifteen state-owned companies are due for divestment with a negligible record to date and the bad asset repository is off to a slow start despite its 10 percent of GDP size. The new Prime Minister is a political novice as his predecessor was rejected for a top Brussels post. Ties with Croatia still in recession are proving problematic as the government there scrambles to pass long overdue structural reforms to ease the debt burden, with pension and tax changes recently introduced.

Hungary’s equity market has dropped 20 percent despite progress in meeting EU budget deficit goals as the Commission otherwise criticizes anti-democratic practices which may increase with ruling party victories in local elections. Deflation has prompted loose monetary policy and central bank reserves will be drawn down for another round of foreign currency mortgage conversion to punish banks for “excess fees and rates. ” Poland is off single digits as it surprised with a 50 basis point benchmark decline with exports and domestic consumption both quashed by sour Russia-Ukraine sentiment.

Argentina’s Blue Mood Muster
2014 October 23 by admin

Posted in: Latin America/Caribbean
Argentina shares were throttled in their Latin America and frontier market-leading 30 percent advance as of Q3 as central bank head Fabrega was accused of allowing the blue-chip swap combining local bourse and New York ADR transactions to circumvent currency controls and subsequently resigned as the “blue” informal peso rate tumbled to 16 or double the official devaluation against the dollar. The institutional maneuver may soon be blocked as the individual salary threshold was hiked for legal monthly $2000 access. The securities regulator, an outspoken presidential ally, took the monetary post as Finance Minister Kiciloff consolidated his interventionist hold and continued at the IMF annual meeting with a tough line against US court contempt judgment in the landmark holdout case. Judge Griesa did not impose fines with the initial decision but they may be aimed against the main state bank’s New York operation for the unauthorized acceptance of trustee responsibility. No bondholder has agreed to external payment through Buenos Aires despite the cabinet chief’s assertion of willingness to shift jurisdiction as well as lend new money. The end-September $150 million par bond installment was deposited domestically with reserves reported at $28 billion or over four months of import cover. Officials took issue with the Fund forecast of recession this year and next as its statistics show flat activity versus outside estimates of 2 percent shrinkage. The government acknowledges unchecked industrial output decline but has not released annualized inflation which private analysts put in the 40 percent range. The weak peso reinforces the trajectory as capital goods imports are off one-third and agricultural exports waver as farmers horde production as a store of value. Internal consumption has also suffered with retail sales off 20 percent in August, and uncertainty was compounded with the passage of new laws giving extraordinary powers now to set profit margins and confiscate assets and redenominate hard currency obligations in pesos in the future. The car war with Brazil worsened further as local assembly lines face parts shortages and President Fernandez blamed unfair competition and “selfish” automakers for attempted gouging.

Brazil’s presidential contest went into the final round with challenger Neves with a slim voter intention margin after eliminated candidate Silva endorsed him as a change agent despite reservations about free-market economic policies. Securities and currency markets pared losses on the opposition swing as presumptive Finance Minister Fraga entered a television debate with incumbent Mantega to present the center-right party’s contrast. The former offered technocratic alternatives to the past decade’s state lending and consumption model as the latter denied recession and fiscal policy erosion. Public sector net debt/GDP is over 35 percent and 6. 5 percent inflation is above target and corporate foreign obligations are $7. 5 billion in 2015. One-third of the $1. 25 trillion in local government paper is inflation-linked and non-resident ownership is almost one-fifth and potential junk status downgrade may tip the somber balance.

Bolivia’s Gas-Fired Freeriding
2014 October 22 by admin

Posted in: Latin America/Caribbean
Bolivian bond yields dropped to 4. 5 percent as President Morales steamrollered to third term re-election with majority legislative control as he trounced candidates including cement company magnate Doria who criticized tripled public spending to $3 billion over his tenure. Per-capita income near $3000 remains the lowest in South America, but a 150 percent jump in hydrocarbon revenue since nationalization has funded social and infrastructure programs like the mountain cable car line between La Paz and El Alto. GDP growth of 5 percent leads the region, but the investment ratio has stayed under 20 percent. Gas output will stagnate over the coming years, and a new private investment law is under consideration to restore confidence after previous expropriations where compensation was delayed. Fitch Ratings recently upgraded the sovereign outlook to positive on the expectation that strong energy import demand from Argentina and Brazil would continue to pay for wage hikes and cash transfers pledged during the campaign. The country’s first Indian leader espouses a socialist philosophy against business elites on the economy and the US and the West in diplomacy but such tendencies have been moderated by the Finance Minister who emphasizes fiscal balance and FDI welcome. An exploration contract was signed with Russia’s Gazprom and before the poll the government announced a $500 million investment plan by the state gas monopoly.

President “Evo” has been closely aligned with his counterparts in Venezuela, but the creditworthiness disparity has gapped between the two with the latter’s downgrade to CCC near default as CDS spreads hit 1500 basis points. An October $1. 5 billion repayment was honored at the last minute amid reports that liability management operations are under preparation, as the EMBI component showed a loss with the benchmark bond yield above 15 percent. President Maduro promised greater transparency in off-balance sheet funds and economic statistics, but Fonden holdings and latest quarter data remain unknown. With large gold allocation liquid reserves are estimated at less than $5 billion and only inflation numbers have been released at 65 percent in August. The black market bolivar rate is over 100/dollar with multiple official levels ranging from 6. 3 to 50 under narrow availability and eligibility. The IMF predicts a 3 percent GDP contraction as long-established multinational firms continue to exit with foreign exchange scarcity and power and security breakdowns. Auto production has plummeted 80 percent on an annual basis and retail sales were off 50 percent in the first half according to industry sources. Import arrears are around $15 billion and could not be covered by the rumored sale of the PDVSA’s US Citgo station network valued preliminarily at $10 billion as Exxon Mobil and other claimants await likely arbitration awards from Chavez era confiscations. President Maduro’s popularity reached a new opinion low as he vowed to keep honoring external debt despite the drumbeat from Harvard professors that the load is unsustainable both on moral and financial terms as the Rogoff-Reinhart team famous for the This Time is Different tome cited an unchanged default pattern.

Mexico’s Gross Simplified Salvage
2014 October 22 by admin

Posted in: Latin America/Caribbean
Mexican local bonds sold off suddenly with the departure of PIMCO founder Gross after he talked up the peso and was a large holder of long-term instruments reflecting overall one-third foreign ownership, as equity outflows tracked by EPFR persisted on a flat MSCI result. The correction followed a post-sovereign rating upgrade and state oil company reform rally coinciding with better 2. 5 percent GDP growth on inflation just over the 3 percent goal. The budget deficit will fall to 1 percent of GDP next year while the current account gap may widen on consumer imports picking up after taxes hit early 2014 demand. The Pemex legislation contained a new formula for federal revenue distribution capped at 4. 7 percent of output with the remainder to go into a sovereign wealth fund. Outside Chile the concept has not caught on with Brazil’s modest version diverted for fiscal and currency support. The extra FDI and savings from the constitutional petroleum shift will not be applied until 2015 when the first field tenders are launched. President Pena Nieto has also stressed education and training and antitrust changes to boost productivity and competitiveness, and has tackled the powerful teachers union and forced the Slim conglomerate to divest telecom assets. Election overhaul is designed to bring transparency to campaign finance and ease fresh and independent candidate entry, but the political opening was overshadowed by reports of student drug conflict killings as law and order dominates provincial agendas. The President’s popularity in turn has plummeted after initial euphoria as ruling PRI factions and rival parties revert to opposition and the immediate positive effects of the structural fixes are minimal. At the annual IMF/World Bank gathering the Finance Minister repeated the mantra of waiting for medium term progress and central bank chief Carstens won media awards as he broke with Latin American counterparts with a no currency intervention stance despite cyclical difficulties. The Fund’s backup contingent credit line remains in place and dollar swap facilities are also available from the Federal Reserve.

Chile’s Finance Minister despite praise over “rainy day” fund use was forced to defend the Bachelet government’s early tax and other moves as they relate to the longstanding market-friendly investment-grade model.
Short term external corporate debt/ reserves is on the fringes of the “fragile five” category and copper dependence still at half of exports prompted Moody’s to cite “structural weakness” in its latest report. The peso was down 15 percent against the dollar at end-September amid a chronic current account deficit. Economic expansion is only 2 percent as the central bank continues to cut rates on inflation double that figure. State-owned miner Codelco received an appropriation for modernization and cross-border partnership pursuit but industry worker wage strikes have dragged on and turned violent. Corporate taxes were hiked to help pay for increased social spending with income inequality stubborn after gross anti-poverty gains a decade ago.

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South Asia’s Street Fight Stall
2014 October 17 by admin

Posted in: Asia
Pakistan shares tried to stay positive on the MSCI frontier index as the latest review of the $6. 5 billion IMF program was delayed on religious and political opposition demonstrations against President Sharif as he summoned the military to restore order. A clerical leader and former cricket star and presidential candidate Khan have called for his ouster on grounds of vote-buying and anti-terrorism bungling as popular discontent lingers with rampant crime and power outages. Foreign reserves at $7 billion cover less than three months’ imports, and further fiscal consolidation which trimmed the deficit to 5 percent of GDP will be difficult with the confrontation. Growth could fall short of 4 percent this year as the central bank remains on hold after early tightening under the resumed Fund accord. With energy subsidy removal inflation is heading toward 10 percent and may require another rate hike, which may also serve to support the currency down 5 percent against the dollar during the standoff. Sri Lanka in contrast has maintained double-digit equity and external bond gains while dealing with animosities between Sinhalese and Tamils and Hindus and Muslims. The north is upset over the slow pace of post-civil war reconstruction amid lingering clashes and minority shopkeepers in the capital Colombo have been attacked for alleged mistreatment of customers. The administration has downplayed the troubles along with a UN inquiry into reported human rights abuse during the two-decade rebel fighting. It has placed consecutive sovereign bonds and pared the IMF’s role to post-program monitoring with 7. 5 percent GDP growth from agriculture, tourism and light manufacturing. Inflation is down to 3. 5 percent with the central bank stance neutral, and the rupee has been stable with incremental capital account opening.

Bangladesh stocks have dominated the subcontinent trio with a 55 percent MSCI advance as of Q3 with over 6 percent growth from both textile exports and domestic demand, and fiscal deficit improvement from VAT introduction under its Fund arrangement. A September mission urged governance changes and recapitalization for ailing state banks that have also fueled corruption and rivalry between the two main political parties. Prime Minister Hasina after winning re-election boycotted by opponent Khalida Zia has managed court approval for a criminal trial against her. The army has stayed away after returning power with earnings from UN peacekeeping missions and its diversified business portfolio at home. The government has common anti-Islamic militant and commercial interests with the new Indian regime as China and Japan continue to offer billions of dollars in aid. Russia has entered the mix with a nuclear plant feasibility study and Dhaka has exploited interest in the region’s newest frontier market Myanmar by proposing a highway connection. The early euphoria there has worn off as infrastructure and professional capacity constraints are overwhelming despite the recent award of foreign investor banking and telecom licenses. The former initial authorization for a single branch and hard currency business was designed for small street presence.



Central America’s Rich Cost Ream
2014 October 17 by admin

Posted in: Latin America/Caribbean
Costa Rica lost investment grade status as the sub-region felt debt and growth pressures prompting investor wariness despite almost double-digit gains for JP Morgan’s NEXGEM frontier through Q3. President Solis has submitted tax legislation to congress in an effort to address the 5 percent fiscal deficit and public debt at 55 percent of GDP, but his party controls less than one-quarter of seats. Growth has fallen below 4 percent with Intel’s plant shuttering and the currency depreciated almost 10 percent against the dollar in the first half although the current account gap remains at 5 percent of output. Panama is the last BBB rating holder but growth there too has slowed to 6 percent and the deficit will breach the 2. 7 percent of GDP set in the fiscal responsibility law, which the Varela administration dedicated to higher social spending has criticized as rigid. FDI up one-quarter to $2. 5 billion in the first half continues to comfortably cover the current account hole but reinvested profits are two-thirds of the total with flat new inflows. The Canal widening should soon be completed after construction contract delays as Nicaragua has commissioned a Chinese company feasibility study for a potential second cross-continent shipping channel. The Dominican Republic likewise experienced a 15 percent direct investment surge in the period after a mining dispute was cleared with tourism a big draw as arrivals jumped 10 percent. The current account imbalance has narrowed with reduced oil import costs as remittances were again up 10 percent on better US employment prospects. A citizenship clash with Haiti has been resolved as resort builders look to both sides of the island for fresh destinations that can be cross-marketed. English-language training has been stressed to draw visitors from competing islands like Barbados, where activity has leveled off amid continued recession. After a ratings downgrade government debt is still near 100 percent of GDP and borrowing has come from domestic bank and non-bank sources that were hit otherwise by a financial asset tax.

El Salvador has been an underweight recommendation since the leftist FMLN retained the presidency and growth lags the rest of Central America at only 2 percent. Dollarization keeps inflation minimal at 1. 5 percent but also embeds a stubborn trade deficit at 15 percent of GDP. Remittances rose 8 percent through August as the main offset with 2. 5 million workers in the US. A Millennium Challenge bilateral grant is designed to overhaul the investment climate and infrastructure but has come under fire from democracy and human rights campaigners for alleged regime abuses. Guatemala’s economy will expand 3. 5 percent with commodities and financial services key contributors, with low public debt as an exception at 25 percent of GDP. Honduras is the latest to join sovereign debt issuance and the business-friendly government has moved to slash the budget deficit to 5 percent of GDP heading into an IMF program. However such progress has been overshadowed by the hefty toll of drug and street crime spurring child immigration to the US where status is unclear.

Ecuador’s Dull Dollarization Dial
2014 October 15 by admin

Posted in: Latin America/Caribbean
Ecuador bonds were up 5 percent on the EMBI through Q3 despite dollarization doubts planted in a new monetary code as S&P raised the sovereign rating to B+ with a stable outlook and the IMF offered muted praise in its first Article IV report in seven years. President Correa has not proposed a dollar alternative but the updated banking framework permits “electronic currency” use as private lenders are subject to stricter mandatory allocation and government oversight. The ratings upgrade was due to a wider funding base after bond market return and “pragmatic” economic policies amid the 2000 voluntary default and high fiscal deficits and oil export reliance. The Fund review cited solid growth and social indicators the past decade but urged relaxation of business and capital controls. The budget deficit will exceed the 5 percent of GDP target this year but the current account is back to surplus on lower imports and a petroleum production increase. International reserves were up 40 percent to $7 billion with renewed Chinese commitments including for hydroelectric projects. The per barrel oil price is off 10 percent versus the first half but non-oil agricultural sales of bananas and shrimp have helped offset the difference. A new field was discovered by Italy’s ENI as multinationals venture back under competitive operating and tax regimes despite the lingering controversy over the Chevron environmental damage case, where the lead New York attorney representing villagers was found guilty of manipulating evidence.

Uruguay is another small index component drawing investor attention as local debt holding period requirements were eased ahead of end-October presidential elections likely to go into the second round with a narrow margin between the leading candidates. The ruling Broad Front representative commands 40 percent in opinion polls, but an opposition victory should keep broad economic policy intact. GDP growth is at 3 percent on good offshore financial services performance with chaos in next-door Argentina compensating for construction decline. Inflation is above the target range at 9 percent and the fiscal gap is again 3 percent of GDP as pre-election spending was added to traditional social transfers. Marijuana legalization was designed to bring in revenue as the experiment is closely watched by South American neighbors. Paraguay’s debut sovereign bond last year has been sporadically tracked as growth levels to 4 percent after 2013’s 15 percent drought recovery. The bumper harvest has faded as the President, a former business tycoon, aims to diversify the economy into mining and services while attacking widespread poverty. A fiscal responsibility law sets a 1. 5 percent of GDP ceiling in 2015, and public debt is less than 15 percent of output as further global bonds will go to finance a medium term $15 billion infrastructure program. Domestic borrowing has jumped 15 percent this year as multilateral development bank-supported efforts resume at capital market modernization as an alternative to the Brazilian border informal trade reportedly on the criminal and terrorist money edge.

Jamaica’s Jumbled Repo Repair
2014 October 15 by admin

Posted in: Latin America/Caribbean
Jamaican stocks were down 5 percent on the MSCI Frontier index through Q3 after a sovereign bond return and mixed IMF program exam which stressed the repo overhang “freezing” fixed income. GDP growth has been cramped by drought but should reach 1 percent in the current fiscal year on near double-digit inflation due to food prices and currency depreciation of 10 percent against the US dollar. Unemployment is almost 15 percent and business confidence is off but increased tourism and opening of a new highway were bright spots. The July $800 million international issue was the biggest to date at a 7. 5 percent yield and will refinance upcoming payments as reserves also aided by remittances topped $2 billion. The central bank has injected liquidity to cut overnight rates to 3 percent, but annual private sector credit extension is still sluggish at 5 percent and concentrates on short-term consumer borrowing. Bank NPLs are at 5 percent but government bond risk lingers after the local exchange last year to qualify for Fund assistance with the secondary market “inactive. ” Both internal and external funding are precarious, as budget discipline depends on further wage reduction and oil import costs would spike with the cutoff of Venezuela’s concessional facilities. Domestic debt revival will entail an upward yield curve shift generating bank and securities firm losses and new financial services oversight legislation will be tested, the review warns. The 7. 5 percent of GDP primary budget surplus is on target for now but state enterprise support must be cut further as in the 45 percent stake in the bauxite joint venture with Alcoa. Public debt is at 140 percent of GDP and asset sales should be accelerated to meet the 100 percent end-decade goal. Securities dealer stress-testing is scheduled as a post-crisis retail repo framework is prepared but emergency backstops may be needed for the transition. Exchange rate adjustment has been helpful but business and labor competitiveness can be improved through more flexibility and automation. Infrastructure should benefit from passage of a proposed power law that facilitates plant launch, the Fund believes.

The global bond reception reflects solid Latin America and Caribbean capital inflows according to the IIF’s October survey, which estimated 2014 debt and equity allocation at $150 billion and the overall thirty emerging economy private total including FDI at almost $1. 2 trillion, over half into Asia and China in particular. Europe will suffer a 60 percent drop with Russia’s sanctions-driven “collapse” as Middle East-Africa interest is steady with a tentative uptick in Egypt, the organization notes. Industrial world monetary policy will see offsetting tendencies from the US and Europe/Japan keeping the low interest “push” intact while the pull is dented by lower GDP growth around 4 percent and flat to negative company earnings. However single-digit valuations for major markets may be compelling as BRIC correlation in mutual funds fades to usher in a potentially messy rebuilding phase with more “downside risk” the outlook cautions.

Local Bonds’ Decade-Long Detour
2014 October 13 by admin

Posted in: General Emerging Markets
JP Morgan’s 10th local bond market guide profiling currencies and fixed-income in dozens of countries traced continued evolution but acknowledged “mounting headwinds” into 2015 with this year’s performance negative in dollar terms until recently. The asset class is sensitive both to the greenback’s surge and expectations of US Treasury yields toward 3 percent in consensus forecasts following the Fed’s latest meeting direction. It has only recovered half the yield spread of the external sovereign and corporate categories prior to 2013’s taper tempest and the meager 1 percent gain projected this year will come entirely from carry, the bank believes. Hedging has been at historic lows as one-fifth of funds that fled since last May have not returned in contrast with hard currency recovery and overall positive EM bond allocation unlike equity. Through September $4 billion in outflows persisted with Japanese retail investors particularly averse. By region EMEA has suffered the greatest blow with Russia’s total just $1 billion in the first half compared to $10 billion-plus averages. Geopolitics is a drag but the lack of domestic insurance and pension fund sponsorship also contributes. The ECB’s creeping QE has boosted currencies against the euro, but the real exchange rate appreciation trend the past decade has waned on souring economic and technical risk measures despite resumed reserve increase to almost $10 trillion for the tracked universe. Forex bid-offer ratios have stabilized, and local bonds’ portion has held steady at over 60 percent of $1 trillion quarterly trading, according to EMTA, with instruments from Mexico, Brazil, India and South Africa in the lead. Central bank intervention has been modest this year and concentrated in big markets like Brazil, Turkey and Korea. Russia despite its wartime support reiterates a free-float objective, and Colombia and Peru have been active among second-tier economies as foreign positioning has grown. Related macro-prudential controls have also been “dialed down” with Ghana an example of reducing previous restrictions after entering IMF program talks. Total domestic debt rose $1 trillion from end-2013 to near $9. 5 trillion, divided 55-45 between government and company. Corporate issuance through Q3 was $420 billion, one-third more than the international version. Fixed-rate paper is the norm and Latin American and Asian markets are the largest, with no European one above $200 billion.

The corporate segment has tripled post-crisis dominated by China, India, Korea and Malaysia with the first two cramping overseas investor access. Liquidity is also scarce due to the buy and hold nature and maturities tend to be less than 10 years. Few offerings are on Euroclear and dealing and settlement infrastructure otherwise is lacking, JP Morgan comments. Inflation-linked bonds outstanding are over $650 billion, with 80 percent from Latin America. Private pension funds there have assets above that amount as a captive fixed-income base, while Asian life insurers control $3 trillion with Hong Kong and Thailand expanding 10 percent annually. Together the contractual savers manage $1 trillion in EMEA, half in Israel and South Africa as Poland’s post-communist pools were drained in the swerving saga.

India’s Diet Choice Chicanery
2014 October 13 by admin

Posted in: Asia
Indian stocks firmed their 25 percent advance as domestic mutual fund joined foreign institutional investor inflows ahead of Prime Minister Modi’s inaugural state visit to the US after successful summits with the Japanese and Chinese leaders. On business and government visits to New York and Washington he will fast in honor of a Hindu festival in carrying a message of religious tolerance and economic reform which has provoked doubts already in his early tenure. Top officials have come from the BJP’s nationalist wing and business has lamented the absence of “big bang” changes beyond better administration, with lingering FDI barriers listed by the US Chamber of Commerce prior to his scheduled speech there. Allocation will jump one-third from 2013 to around $30 billion but continue to shun infrastructure and power despite faster project approval. The Asian Development Bank raised 2015’s GDP growth forecast to over 6 percent and the sovereign ratings outlook went to stable, but the fiscal deficit is stuck at 4 percent of GDP and inflation in high single digits. Small stakes will be divested in government enterprises through the Mumbai exchange but tax disputes hang over previous international participation as coal leases offered at the end of the preceding term were overturned by the courts on corruption suspicions. The trade deficit is down on lower energy and gold imports, but manufacturing and services exports have disappointed. The central bank has been on hold but will grant new private licenses and conducted a sweep to root out “bad apples” resulting in the arrest of Syndicate Bank’s chief executive for alleged bribery. HFDC and other lenders have responded to the Prime Minister’s call to serve the rural population but they are coping with non-performing assets expected to reach 10 percent under tougher classification standards. Corporate debt has doubled the past decade to 50 percent of output with family conglomerates also borrowing heavily abroad to finance acquisitions and operations to accumulate a $100 billion load. International funds have been wary of long-term rupee and bond bets as they anticipate public and private sector deleveraging, which could again be accompanied by access and exit controls should the historic crisis pattern persist. Business community defenders of Modi’s record to date point out that expectations were exaggerated in light of bureaucratic and political inertia and that judgment should be postponed pending several months in office and passage of critical provincial level elections which could aid his national position.

They add that on the diplomatic stage departures are already evident with a reported “pivot” to Japan to offset China, which responded with a $20 billion bilateral investment pledge. Outreach to Pakistan and Nepal with recent troubled relations has also featured and in Fiji elections were held with India’s assistance restoring civilian power. In the Maldives islands Indian and Sri Lankan firms have increased their environment and tourism presence as they threaten to sink in a global warming nightmare without a regional low-carbon diet shift.

Green Finance’s Postponed Pollination
2014 October 8 by admin

Posted in: General Emerging Markets
As world leaders gathered at the UN General Assembly to debate potential climate change agreement renewal before next year’s Paris conference, the World Bank and specialist groups have estimated a 50 percent annual funding shortfall. Of the $350 billion total, two-thirds comes from the private and one-third from the public sector. Project developers, development banks and government aid agencies are the main sponsors. Clean energy solar and wind facilities are the primary focus along with low-carbon buildings and infrastructure. The current amount available often bypasses vulnerable low-income economies and is far from the $700 billion to $1 trillion projected global modernization need. Bond fund investors controlling $80 trillion have been part of the investor base committing $250 billion in 2013 but seek innovative structures and risk guarantees typically lacking, according to the Bank, which has responded with special loan and insurance backing. Countries can improve their policies through carbon pricing mechanisms, fossil fuel subsidy elimination, and clear and enforceable pollution standards even as 150 UN members support renewable alternatives in principle. The dedicated green bonds market has grown to $20 billion after a decade of preparation with European public pension funds screening for “clean” allocation and the Rockefeller family office in New York dropping its traditional oil company portfolio over time. Retail interest has entered and could be further tapped if plans are realized for a $100 billion annual Green Climate Fund as outlined at the last global summit, the organization believes.

The UN body may also further debate sovereign debt restructuring after overwhelmingly adopting a resolution at the instigation of Argentina and Bolivia to negotiate a multilateral treaty. This statutory formula had been rejected a decade ago when the IMF proposed amending its charter to create a resolution forum. The prevailing contractual emphasis since has been on incorporating and strengthening collective action clauses in bond covenants, and the Eurobond trade association ICMA has drafted new language on aggregating instruments which would prevent minority holders from blocking restructurings. The UN move won praise from prominent academics who have criticized US court overreach allegedly prompting Argentina’s latest default but immediate action has again centered on the Fund where guidelines to automatically extend private debt maturities in unsustainable cases may be approved at the October annual meeting. In New York Judge Griesa must soon decide again whether exchange payments can go to non-US investors after granting permission in the original freeze as Citibank tried to get a ruling from another tribunal. Buenos Aires has formally passed legislation to shift the existing swap’s legal jurisdiction there or to a “friendly” location like France, but the reputational and technical impediments to acceptance will exclude mainstream funds. Both confrontation and the recession are hardening, with a 2 percent contraction forecast on 35-40 percent inflation especially as the informal peso premium is near double the official 8/dollar rate. Capital controls have tightened further as a law was just added to direct private company pricing and profits which may first be applied to soybean exporters with stunted stockpiles.

Financial Sector Assessments’ Disputed Formula
2014 October 8 by admin

Posted in: IFIs
The IMF and World Bank prior to the annual meetings offered a third review of the 15-year old joint financial sector assessment program which noted strengthening since it was incorporated into Article IV surveillance in 2010 but also wide scope for improvement in gauging cross-border and bank-nonbank risks. Since the 2008 crisis three areas have been highlighted: overall vulnerability, stability policy and prudential supervision in practice and safety nets through the prism of balance sheet stress testing and international codes observance. A formal screening framework was introduced and 90 percent of country participants were satisfied with general coverage. Contingency scenarios always apply to banking but have expanded to insurance and solvency, liquidity and contagion are measured. Techniques were refined in a staff manual but underlying data are not always available or reliable for full exercises, especially outside the 30 designated “systemic” members, the Fund reports. Important operational and fraud threats are not considered and outward channels are rarely addressed alongside foreign credit and capital inflows. Targeted macro-prudential controls are new tools and are harder to benchmark than the traditional BIS banking, IOSCO securities and IAIS insurance principles. The Financial Stability Board enshrined by the G-20 in the wake of the crash has launched its own voluntary testing aimed at sixty countries, which tends to overlap and “fatigue” local counterparts. As an alternative under the FSAP process they can choose individual stability and development modules in view of priorities and mutual resource constraints. A Bank-Fund Liaison Committee of senior executives coordinates the content and effort including complementary technical assistance. One-third of recommendations are completely followed and 90 percent are published, with emerging and low-income economies often demurring. A rough regression indicates findings can affect markets especially bank valuations, but diminishing downloads over time suggest brief “shelf life. ” They are mainly bilateral but regional reviews were conducted for the EU, Central and West Africa CFA Franc zones, and the East Caribbean Currency Union. The recent annual average output has been 15 FSAPs, with the individual cost at $1 million. For the most advanced global centers expenses are double, while they are half for non-systemic developing nations. This fiscal year work was presented for Kazakhstan, Jamaica, Lebanon and the East African Community, but poor economies typically lack current and integrated analysis and troubleshooting, and occasional technical missions cannot substitute the Fund laments. Along with adding more flexibility to the core product cost limits and sharing could free resources from the major country undertakings for potential redeployment, it proposes.

Separately the Asia Bond Market Initiative likewise marking 15 years outlined its latest quarter progress and statistics until end-June. Local currency instruments outstanding were up slightly to $8 trillion, with $5 trillion from China as Vietnam grew the fastest. The ten markets’ size is 60 percent of GDP, and the government-corporate split is 60-40. Maturities have concentrated at the 1-3 year shorter end as thus far solid foreign holdings may soon transform with liquidity change, according to the Asian Development Bank.

Brazil’s Silva Bullet Ricochet
2014 October 3 by admin

Posted in: Latin America/Caribbean
Brazilian stocks seesawed with presidential election voting intentions on the eve of October’s first round with main opposite candidate Silva roughly even with the incumbent Dilma and pro-business party standard-bearer Neves the potential swing influence in the likely second ballot. Silva’s platform has departed from the single-issue environmentalism which motivated her Green movement challenge the last contest and now embraces financial community nostrums like pension reform and central bank independence. Both aspirants have criticized the Administration’s continued fiscal giveaways leaving a negligible primary surplus even as the new sovereign wealth fund was tapped to keep it above 1 percent of GDP. The consensus growth estimate has been slashed to 0. 5 percent this year on lagging internal and foreign demand as inflation drifts toward 7 percent. Finance Minister Mantega who will not be reappointed in a second term denies recession, and after blaming global liquidity for real appreciation now fights the opposite “currency war” with swap intervention as the dollar level touches the 2. 4 range. The central bank has paused rate hikes until after the poll with the benchmark at 11 percent and credit expansion slowing to 10-15 percent. Reserve requirements were recently eased but corporate and consumer loan appetite is subdued. Company debt has risen to 50 percent of GDP but officials have provided reassurance about international low-cost long-term borrowing and depict OGX’s collapse last year as a criminal fraud under several investigations. Petrobras remains the largest issuer in the CEMBI and its chief executive, a close Rousseff ally, continues to argue operations and the balance sheet are well-managed despite allegations of large lawmaker bribes and overseas project waste. The former refining division head has implicated a cross-section of prominent politicians, and the press has compared the fallout to top aide mischief during the Lula era which resulted in resignations and prosecutions. Silva backers have been fingered but her anti-corruption reputation remains intact according to opinion surveys which instead question social conservative views. She has enlisted mainstream economists as advisers, but the Neves camp can spotlight acclaimed previous central bank chief Fraga who held the post during the early 2000s crisis requiring IMF help. His recommendations include reductions in state development bank lending and Petrobras fuel subsidies as well as VAT introduction and further trade liberalization which could shrink the 3. 5 percent of GDP current account deficit.

Mexican single-digit stock gains have been roughly the same as it seeks to boost FDI and shake up the government oil monopoly with private bidding for assets and exploration due to start early in 2015 after the recent adoption of enabling laws. A turnaround expert is at Pemex’s helm but as with other reforms in telecoms and education the results will be take time according to President Pena Nieto, whose approval rating has dropped below 50 percent. GDP growth is stuck at 2. 5 percent with infrastructure spending set to boost performance although fiscal balance will worsen. Low worker productivity is a chronic obstacle and the central bank has refused peso intervention with the IMF flexible credit line in place and half of long-term bonds with foreign institutional investors thus far reluctant to pull the trigger.

Saudi Arabia’s Unsettled Opening Salvo
2014 October 3 by admin

Posted in: MENA
Saudi shares continued their 30 percent MSCI climb as initial direct foreign ownership limits were circulated and bank heavyweight NCB prepared a flotation despite run-up prudential fears voiced by the IMF in its Article IV report and the launch of joint military operations against the Islamic State in the region under US coordination. The capital markets authority tabled a 49 percent maximum individual and aggregate 20 percent control ceiling for qualified international institutions, with at least 5 years in operation and $5 billion in assets according to the preliminary formula. Eventual promotion to the core index following the recent Qatar and UAE path could bring in an estimated $40-50 billion as fund managers gravitate toward the Gulf’s largest weighting. Many are already active through structured swaps and ETFs but complain of high costs and low liquidity with P/E ratios around 15 also deterring allocation. The opening move has been previewed for years and was pushed by a $150 billion program to develop the non-energy economy and generate skilled local employment. The Fund’s September macro review cited these priorities despite the pivot global oil producer position as the number two exporter and only leader with spare capacity. Despite price decline output has been constant since 2013 fostering GDP growth near 5 percent on better food-driven inflation at 3 percent. With heavy infrastructure spending on transport, housing and holy shrine upgrades the fiscal surplus will slacken to 2. 5 percent of GDP, as the current account excess likewise narrows. Bank private credit expansion has slowed to barely double digits although mortgage activity is up 30 percent following passage of a new law. Capital ratios are steep at near 20 percent of assets and NPLs are just 1. 5 percent, but the IMF recommended consideration of equity market exposure rules. Debt market development could also feature for fund-raising and monetary policy purposes, but the government after previous difficulties is intent on minimal issuance unlikely to foster a benchmark yield curve or secondary trading, and has not yet approved overseas involvement despite workshops regularly organized by industry and ratings groups. Mortgage-backed securities may be introduced in the medium term as the Kingdom’s home ownership rate is just 35 percent and another 500,000 units and cheap loans have been pledged so far to meet demand.

The UAE advance has retraced to 40 percent as an IPO for a unit of big builder Emaar goes ahead and the Sharjah emirate debuted a $750 million sukuk that was oversubscribed tenfold. Asian and European buyers took almost half the A-rated issue, which priced inside Dubai’s at a spread under 150 basis points. The latter’s ruling al-Maktoum family insists the debt crisis is past as it embarked on a $30 billion global airport hub project as passenger volume is due soon to outstrip London’s Heathrow. The quasi-sovereign Investment Corporation launched a Korean joint venture and increased its stake in Africa’s biggest cement company, Nigeria’s Dangote, which has also solidified its presence in electricity distribution.