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Iraq’s Stalled Post-ISIS Stake
2018 March 2 by admin
Posted in: MENA
Iraqi bonds and stocks held by specialist foreign investors tried to shake off extended torpor, as a donor conference convened in Kuwait to pledge reconstruction help since Mosul was retaken to finally expel ISIS after a 5-year fight. The World Bank using on-the-ground and aerial drone surveillance estimated initial physical and social rebuilding costs at $90 billion, as roughly half of the IMF’s $5 billion facility agreed in 2016 has been used despite “frail” performance on fiscal consolidation and bank restructuring. Baghdad still owes the conference host $5 billion in compensation from the early 1990s invasion by Saddam Hussein which has been deferred, and other Gulf allies are expected to chip in alongside Asian and European counterparts and Iran.
The US recently provided a Treasury Department guarantee for a sovereign bond issue, but the Trump administration will not offer new economic assistance as it reviews bilateral relations following a tiff over Kurdish region independence where oil reserves are concentrated, and ahead of April scheduled elections where sectarian political divisions and violence again threaten. President Trump’s controversial campaign mantra about “taking the oil” in exchange for continued military support has featured in the debate as production ramps up toward the 5 million barrels/day target for the leading OPEC member. It is also flaring less natural gas to realize a reported $6 billion in lost earnings, and electricity supply has improved with private sector responsibility for distribution. However petroleum exports still account for 90% of government revenue as the security mess and a decades-long legacy of state control hamper normal enterprise and financial sector development. On the stock exchange, capitalized at only 5% of GDP, foreign buying tends to chase the few competitive stocks available, such as Coca Cola’s local bottling unit and number one weighting telecoms provider Asiacell.
Economic growth will be positive in the forecast 2-3% range this year with the better oil picture, and on the assumption that the displaced population of several million citizens and refugees can return to employment. Inflation is subdued with the continued exchange rate peg to the dollar, which the IMF views as “appropriate” for post-war stability as the parallel market premium dropped to 5% with ISIS’ defeat. Double-digit fiscal and current account deficits were the norm during the conflict and are due to narrow to manageable levels, but public debt spiked to 65% of GDP, including external arrears on non-Paris Club obligations and short-term rollovers to state-owned banks in turn funded by the central bank. To curb spending the public sector payroll and electricity subsidies were cut, and the revenue side will be bolstered by new import taxes and tighter customs enforcement. The government will decentralize budget responsibility to provinces and major cities, and has tried to streamline investment approval, with its World Bank Doing Business ranking at 160 of 180 countries, while considering partial privatization for hundreds of officially-run companies from the Saddam era. The onset of 3G in 2015 and the internet’s spread encouraged burgeoning e-commerce, and consumer goods and construction have emerged as diversification plays on big traditional industry names on the stock exchange now in the portfolio of Middle East and Asia-dedicated frontier funds.
The two Rs, Rafidain and Rasheed, dominate the “shallow” banking system with 70% of deposits and half of credit and act as a “drag,” according to the IMF’s 2017 Article IV report. They have not been audited under international standards and are “severely undercapitalized” with double-digit bad loan portions. Anti-money laundering and terror financing rules are absent, and the central bank lacks oversight and monitoring powers and has also been charged with providing small business lines. However in the past two years private competitors have grabbed share from the seven state institutions as Gulf regional banks also acquired local stakes. Traditionally the government giants handled all wages and pensions and trade finance, and without deposit insurance they also enjoyed an implicit guarantee as comparative advantage. A formal scheme is now under preparation, and with US Agency for International Development help a central credit registry is another project which can spur consumer as well as company lending. With stricter prudential rules capital has more than tripled to $7 billion over the ISIS attack period, and intrepid investors in attendance believe such smaller-scale reconstruction may succeed well before Kuwait conference ambitions.
Multilateral Development Banks’ Shifting Agenda Shortcuts
2018 March 2 by admin
Posted in: IFIs
As the G-20 prepares to receive the findings of a high-level appointed group on the multilateral development banks’ future, think tanks worldwide have begun to submit recommendations, with a February paper compiled jointly by Brookings and CGD in the US and ODI in Europe. The authors argue that the system must deliver more to pursue the 2030 Sustainable Development Goals in terms of governance and “operational and policy coherence. ” Common data, project design and technical assistance platforms are overdue, and approaches should be adapted in the categories of fragile, high-debt and upper middle-income countries. Global public goods can also be targeted in combination on issues like climate, health, migration and financial crisis. Capital and leverage can be scaled up to mobilize trillions of dollars for infrastructure and other needs, and portfolios can be turned over to the private sector at return and management thresholds. Shareholder oversight should not be limited to individual institutions and incorporate competing and complementary missions through UN bodies. The next two decades will see history’s biggest urban expansion and landmark developing world demographic transition, especially with Africa’s youth bulge. The banks’ “value proposition” is to stay a trusted partner able to offer capacity and reform advice, long-term funding, and global and regional expertise and help when economic instability spreads. Pure financial transfers barely register in middle-income countries where they are less than 1% of private flows, but “development solutions” remain in demand. The World Bank’s net allocation is now lower than regional counterparts, and clients seek input on cross-cutting themes like connectivity, small business formation and inclusion and inequality. Donor harmonization was pledged in the Rome Declaration 15 years ago but application has lagged, with the new Asian Infrastructure Bank trying to avoid uncorrected overlapping and onerous safeguards. Collaboration on public-private partnerships, evaluation and procurement has increased but core agendas are still at odds and often redundant, according to the filing. Shared country and sector strategies, research and impact measurement are viable, and will facilitate the so-called cascade effect for commercial finance as little used instruments like guarantees are more widely deployed. Regular asset sale programs should in turn be scheduled to release original capital and prevent constant shareholder calls.
In fragile states reconstruction should not be delayed over constitutional and electoral formulas and be supported mainly by grants. Administrative procedures should be more flexible and bank staff should handle the load instead in “low capacity” places. Debt sustainability risk is high or moderate in 30 chiefly African countries that got official relief and now tap external bond markets, and management complexity must take into account rollovers, contingent liabilities and other aspects where MDBs can offer global lessons and tracking mechanisms. Advanced emerging markets still may seek public finance at the sub-national level and policy dialogue and peer convening power where private debt and equity sources do not engage. The Bretton Woods lenders have not been thoroughly reviewed for 75 years and lack a “periodic ambition and mandate inventory. ” The report calculates that their $40 billion base can be multiplied the next decade for $2 trillion in resources under far less conservative loan/asset ratios. Individual banks have their own comparative advantages such as the EBRD in energy and AfDB on water and topical rather than geographic focus can define future relationships from high-level summits to daily communications as a tangible near-term goal, it concludes.
South Asia’s Bulging Belt Lashes
2018 February 24 by admin
Posted in: Asia
China’s multi-trillion dollar hard and soft infrastructure investment Belt and Road Initiative (BRI), officially entering its fifth year, was again in the spotlight at the Davos World Economic Forum, where Asian portfolio managers tried to assess stock market recovery prospects in major recipients Pakistan and Sri Lanka in particular. Their MSCI component indices lost 21% and 1% respectively in 2017 as all other Asian exchanges tallied double-digit gains. A recent paper by the Washington-based Center for Strategic and International Studies (CSIS) noted that Beijing loaned Colombo $1. 3 billion for a port multilateral development banks refused, and then took an 80 % equity stake in lieu of unpaid interest as part of an $8 billion portfolio in the country ahead of 2019 presidential elections. Pakistan’s traditionally close commercial and diplomatic ties, especially as the US plans to cut back on economic assistance in anti-terror cooperation protest, have strengthened with a $60 bilateral aid and building program.
However Sri Lanka’s high debt, along with corruption scandals and political standoff, forced recourse to the IMF in 2016, and Pakistan is expected to return there imminently without additional backstop from more cash-strained Gulf donors. Currencies have plummeted in both places to aggravate food and fuel-price driven inflation, and the BRI cannot mask leadership doubts and fiscal and monetary policy lapses.
The CSIS analysis points out that Chinese projects barely benefit local contractors, as their own companies get 90% of funding. State-owned construction firms in particular, at seven of the world’s ten largest in 2017, can draw on massive size and subsidies. From 2000-2014 development bank credit totaled $350 billion, three quarters on commercial terms, with focus on the power and transport industries. In contrast with Western providers China’s approach is “centralized and flexible,” with unified agency decisions and relaxed environmental, social and governance standards. Natural resources are accepted for payment instead of cash, and capital outflow restrictions are not as strict for BRI deals, according to the document. It adds that large infrastructure schemes are unlikely to be completed on time or budget, and typical Chinese labor over-reliance will spark backlash.
In Davos Pakistan’s Prime Minister Shahid Khaqan Abbasi dismissed debt trap concern over the Economic Corridor with China, which he insisted would proceed under mutual “sustainability” principles and was designed to stimulate all foreign investment with energy and security improvements. However in December water authority officials scuttled a proposed $15 billion dam project over Beijing’s onerous financing demands, and railway deals in Karachi and elsewhere were also put on hold. In January the government’s own debt policy statement acknowledged deterioration in external servicing ratios across-the-board as the total hit $85 billion, versus $15 billion in foreign exchange reserves covering just three months imports. After successfully placing Eurobonds in conventional and sukuk form late last year, rating agency Moody’s warned that further rupee depreciation and the persistent 3-4% of GDP current account deficit would hurt “affordability. ”
In Switzerland the Prime Minister spurned the prospect of immediate elections and IMF program application, as he previewed a tax amnesty to extend collection beyond the current less than 1% of the population and restrain public debt buildup at the 65% of GDP danger zone. He pointed to information technology as an emerging domestic demand driver buttressing traditional garment exports and remittances for 5% predicted economic growth this year, according to the World Bank. Double-digit credit increases and good monsoon rains should support near-term performance, but analysts caution that capital account trouble could materialize under currency flight and debt reimbursement pressures.
Sri Lanka’s official growth forecast is for the same pace, as foreign direct investment was estimated to double to $1. 5 billion in 2017 amid good agriculture and tourism earnings. Going into February parliamentary polls President Maithripala Sirisena and his minority party are struggling with popular outcry over tax hikes and 8% inflation, with staple coconut prices doubling. The IMF arrangement aims to limit the fiscal gap to 5% of GDP, which the central bank has historically bridged through money printing. Domestic debt maturities peak this year and foreign ones over 2019-22, according to experts, but the President announced in January that he did not have a detailed accounting for $60 billion or 90% of previous external loans, a claim that stretched both credulity and comfortable Belt size.
Central American Remittances’ Premium Protection Stakes
2018 February 24 by admin
Posted in: Latin America/Caribbean
With the US planning to lift “temporary protection status” for Northern Triangle El Salvador, Honduras and Nicaragua and Haiti migrants, remittances jumped 8% to $75 billion for the seventeen countries in the Inter-American Dialogue database last year. The pace was a multiple of 1% regional GDP growth and mirrored export increase. For Central America and the Caribbean 3. 5% growth was due to a 15% remittance uptick, and the numbers reflected continued North American labor demand as well as dollar depreciation in Mexico, the Dominican Republic and Costa Rica. The violence-prone Triangle area has been in recession for a decade and families continue to head to the US border with apprehensions also declining. In Guatemala as an example 15% of the Western Highlands population left and transfers were up 17% according to the central bank. One-quarter of El Salvador’s citizens want to leave, surveys show, and in the Dominican Republic despite greater stability the number of transactions has jumped. Haitian emigration on the eighth anniversary of the record earthquake is toward Canada and South America as well, particularly to Brazil and Chile, which now hosts 100,000 in contrast with 5000 before the event. Mexican remittance growth was steady at 6%, but the weaker dollar may have prompted slightly lower volume. The individual principal amounts sent roughly reflect the 2016-17 aggregate changes, but deportation fears may be forcing more savings on hand in case of such action. The flows contribute in the range of 5-35% of GDP, and work abroad is often the main alternative to informal employment at home, with substandard pay and labor protection. In El Salvador and Haiti immediately targeted for status termination, they account for one-third of national income, and Haitian migrants with the TPS designation are 6% of the total, the Dialogue report notes. President Trump allegedly used an epithet to describe the poorest hemisphere country, as a 2017 survey of five US cities revealed mounting Latino anxiety over potential law enforcement crackdown or new taxation.
On average a dozen payments are transmitted annually and only one-tenth are through the internet. With a tax 40% polled would resort to informal services, and one-quarter plan to cut amounts. One-third of immigrants think they will be deported, and 60% do not expect home government support. Over half would be open to a fine to normalize status, and the same portion claimed jobs were harder to get with the Administration’s tougher despite the healthy US economy. 70% of respondents believe that the door will be shut altogether to legitimate refugees as the provisional shelter program also lapses. Honduras’ external bond was shaky as President Hernandez was inaugurated for a second term after a disputed election fostering street protests and a security force response with live ammunition. The opposition candidate, a sports broadcaster, cited computer manipulation of his apparent victory and national strikes were organized against “dictatorship” as the Organization for American States urged a rerun. Chile may harden its line against Haitians after President Pinera’s second term win, which upgraded the growth forecast to 3. 5% on boosted private sector confidence and modest rate cuts alongside but he may turn previous social spending promises to rubble.
Kazakhstan’s Sullied Diplomatic Splash
2018 February 17 by admin
Posted in: Asia
Kazakhstan’s MSCI frontier stock component, after a 70% gain, and dollar bond prices at 130 cents both sputtered into 2018 as President Nursultan Nazarbaev marked twenty-six years at the helm with high profile foreign investor energy and banking clashes despite a triumphal US visit. In Washington President Trump dismissed corruption and money laundering references to the long reign with his own campaign under the microscope for Russia and neighboring ties, and in New York while chairing the monthly seat rotation on the UN Security Council, the Kazakh chief was praised by Secretary-General Antonio Guterrres for Central Asia development and anti-terror initiatives focusing on infrastructure and drug crime. While there Wall Street money managers also probed details of scheduled sovereign wealth fund partial state enterprise sales to include the airline and natural resource holdings.
European counterparts had previously joined the parade after the EU inked a Partnership and Cooperation Agreement, which aims at bilateral “WTO-plus” free trade slashing both tariff and non-tariff barriers. The pact came on the heels of the country’s 15 place jump on the World Bank’s Doing Business ranking, despite staying in the bottom quartile of Transparency International scores. The European Bank for Reconstruction and Development also signed a new 3-year program memorandum stressing small business and privatization support. However these official achievements were blemished by simultaneous private antagonism after the local unit of US electricity operator AES was seized for one dollar, and Bank of New York Mellon was forced to freeze $22 billion or half of Kazakhstan national fund assets to satisfy a possible Moldovan oil and gas investor claim. At the same time banking instability at home spiked when the ninth largest institution, RBK, was rescued after a depositor run for reported fraud, at an estimated initial $1. 5 billion tab. The sector was still coming to grips with the forced merger of the two state behemoths Halyk and Kazkommertsbank, as bad balance sheets linger a decade after the original crisis despite the President’s positive diplomatic headlines.
In his January state of the nation speech President Nazarbayev repeated financial system cleanup and anti-corruption priorities without hinting at an executive succession preference or timeframe, even though parliament in principle gained relative power under 2017 constitutional amendments. He continues to dismiss cabinet members and prime ministers at will, and unilaterally decided on an alphabet switch from Cyrillic to Latin script creating widespread academic and professional confusion. After Kyrgyzstan’s President reportedly insulted him the border was closed temporarily, and Astana delayed its neighbor’s membership in the Russia-led Eurasia Economic Union. Last year GDP growth came in at 4% on 7% inflation, and the central bank recently reduced the base rate to 9. 75% as the tenge firmed around 325/dollar. Oil price rebound spurred a 25% trade and an almost 10 million barrel/day output rise, with Kazakhstan now the top over-producer in the OPEC and allies’ global agreement. The Economy Ministry said hundreds of projects were completed under the 5-year privatization plan, as the new Astana International Financial Center based on advanced economy legal and operating standards began registering companies in partnership with the Shanghai Stock Exchange and NASDAQ.
The dedicated offshore framework must contend with the harsh image and arbitrary rule displayed several months ago in the AES saga, where the Fortune 200 power company was stripped of control over two hydro-facilities run since the 1990s. It spent hundreds of millions of dollars installing a state of the art electricity grid only to have a contract compensation clause ignored, when the government demanded ownership and offered one dollar for alleged violations instead of the $90 million AES calculates is due. The debacle was soon followed by the wealth fund asset freezes in the US and Europe in long-running Moldovan investor actions against the state, after it confiscated petroleum fields in 2010. The plaintiffs won a $500 million international arbitration award and tried to enforce payment in Belgian and Dutch courts with Kazakhstan filing counterclaims, and they threaten to pursue future compensation in the giant Kashagan tract if the damages are not met. With over $20 billion in reserves off limits, the Nazarbayev administration will have difficulty mustering additional bank rehabilitation lines, and financial markets will remain wary pending development of a successor plan emphasizing instead governance and management overhaul. .
Turkey’s No Good Cresting Credit Craze
2018 February 17 by admin
Posted in: Europe
Turkish stocks were pressed to sustain their 2017 35% MSCI gain as political opposition to President Erdogan further solidified with a successful gathering organized by the new Iyi (good) party founded by a former interior minister expelled from the ruling AKP, and the central bank hoisted rates 50 basis points to stem near 15% inflation from the state-credit turbocharged economy expanding 7% in the third quarter. Investors were also spooked by a senior Halkbank executive New York conviction in an illegal gold for oil trading scheme with Iran violating sanctions, which may result in SWIFT network dollar-clearing curbs. Iyi’s head Aksener fashioned a conservative cultural anti-terror platform which promotes women’s rights and criticizes the presidency’s unchecked powers. Over 50,000 have been jailed and hundreds of thousands of government employees were removed under broad security authority after the botched putsch, and waves of educated professionals otherwise fled abroad. The US has been accused of aiding plotters and of encouraging a Kurdish stronghold along the Syrian border, while Turkish embassy personnel were accused of beating protesters in Washington during a bilateral summit. Visa services were suspended between the two countries in the aftermath, and overtures to Russia and China have increased on commercial and military cooperation. Western human rights groups have blasted the regime’s strong arm tactics, including confiscation of leading private company assets, as well as harsh refugee treatment despite hosting over 3 million escaping Syrians. With emergency law tourism is down despite the softer lira toward 3/dollar, and the current account deficit again approaches 5% with booming domestic demand, on household spending up 12% annually. Turkish business has borrowed $215 billion overseas, and the government will keep weaker firms from assuming more debt under recent changes. Banks likewise depend on foreign lines, and their position may be more precarious with global monetary tightening and lingering exposure from the guarantee fund push.
Refugee labor market practice was condemned in a December report by advocacy organization Refugees International calling for “sustainable solutions” after seven years of Syria’s civil war. Despite government and EU assistance the population must “fend for itself,” and can only find informal economy work with substandard wages and conditions with few permits issued under a 2016 program. Over 5000 Syrian-owned businesses have opened, but employees otherwise face prohibitive administration and fees. One million are in Istanbul, and over 90% are in urban centers with limited language and skills access. They are under “temporary protection” and must live in the city where registered and wait six months to apply for work approvals, now at 15000 total since introduction. Cash transfers are minimal for family support, and households typically must also send money to relatives in Syria. An estimated 80% of refugees are in the underground sector, and 40% of children are out of school in such labor, particularly in the low salary textile industry. The survey documented scarce permit information through community centers and employer hiring appetite with the minimum wage, social security and other charges attached. Few refugees speak Turkish and they encounter long delays in obtaining ID cards prior to seeking permits as well as discrimination in renting which can literally undermine prospects for roofs over their heads, according to the analysis.
The World Bank’s Circuitous Cyclical Bounce
2018 February 10 by admin
Posted in: IFIs
The World Bank’s January Global Economic Prospects report was upbeat over immediate and medium-term developing world growth, with the average put at 4. 5% this year, but noted long-range productivity drags which could dent the story without labor, education and business climate breakthroughs. Recovery was clear in 2017 with commodity price upswings and big countries like Brazil and Russia out of recession, and the low-income group will outperform at 5. 5% as they are in an earlier phase of capital accumulation with favorable demographic trends. “Disorderly” financial markets remain a risk with steeper borrowing costs hurting corporate balance sheets in particular, alongside geopolitical and trade protection threats. For commodity importers output gaps are near zero, and fiscal and monetary policies generally may be exhausted in extending the cycle placing the onus on structural changes that boost investment quality and living standards. Chinese growth will drop half a point to under 6. 5% in 2018, as housing slowdown and bank regulatory crackdown take hold, and ongoing dangers include state corporate debt above 250% of GDP and the aging disproportionately male population. Global trends have been positive with trade volume due to rise 4% annually despite value chain stabilization and spreading tariff and procedural barriers on an estimated three-quarters of G20 member exports. Advanced economy gradual central bank rate and balance sheet normalization has been “accommodative,” with portfolio and banking allocation driving cross-border capital flow rebound with FDI “broadly stable. ” However European bank lines are still “subdued” as they regroup on the continent under common supervisory norms, despite 20% oil and metals price jumps in client countries last year while food values fell slightly.
Industrial production as measured by PMIs is at multi-year peaks, and lower inflation has supported private consumption. Gulf and African energy exporters have struggled with price fluctuations and delayed budget and exchange rate adjustments, with security and social tensions a byproduct. In India investment has been “soft”, while EU structural funds aided Hungary and Poland. Mexico faces NAFTA renegotiation, but smaller Asian economies benefited from China’s Belt and Road infrastructure scheme. Poorer countries reduced poverty, but in one-third per capita income shrank with political upheaval worsening in places like the Democratic Republic of Congo. In this category fiscal and current account deficits fell, but government debt went the opposite for an average 55% of GDP. More trade-dependent emerging markets will reap gains from stronger industrial world investment, but “stretched” asset valuations raise doubts, and impaired credit quality, combined with higher leverage and historic low risk compensation, could spur corporate bond reversal. China could be especially susceptible after a prolonged debt boom and financial stress there would have wide-ranging “adverse” effects. Bank profitability is solid but capital buffer erosion is pronounced in India, Russia, South Africa and elsewhere. The UK-EU Brexit standoff, Korea and Middle East conflict, bilateral and regional trade pact modification, and international migration waves are other obstacles. Oil prices could slip again as green energy alternatives become less expensive and easily connected, and expansionary Chinese fiscal policy may spike public debt as sustainability is a core issue in the larger universe, especially if sovereign contingent liabilities are counted. Better skills and training are vital to future economic health, but the prescription could also worsen inequality in coming cyclical turns, the Bank concludes.
Indonesia’s Flailing Floor Plans
2018 February 10 by admin
Posted in: Asia
The Jakarta Stock Exchange’s tragic floor collapse, injuring visiting high school students, prompted management promise of an immediate “audit” into its cause at a time when investors are probing 2017’s lagging 20% MSCI Index gain against regional counterparts. While they do not consider the incident a possible metaphor for outright cratering, this year’s political, economic and banking system path will remain bumpy to block outperformance. Output passed $1 trillion, but 5% growth is below the 7% President Jokowi pledged after winning office. He faces re-election in 2019 and provincial polls this June, with rating agency Moody’s noting the calendar’s “likely slower reform momentum. ” Rival Fitch upgraded the sovereign to BBB in December and praised monetary policy limiting volatility and capital outflows, but also cited poor government revenue collection and lingering “structural weakness. ”
The President brought the Golkar party into the ruling coalition to advance his anti-corruption and infrastructure development agenda, and parliamentary speaker ally Setya Novanto now confronts bribery charges along with other members of the legislative and commercial elite. He has used several ruses to evade trial, although his behavior follows a 2015 pattern when a tape recording exposed an extortion attempt toward miner Freeport McMoRan. Jokowi was already in political peril after his protégé lost the Jakarta governor’s race amid allegations of Islamic blasphemy, as religious controversies continue to interfere with economic modernization initiatives including industrial sector external opening. Conservative clerics and protectionist advocates oppose further foreign entry into banking, where the ownership cap is 40%, despite administration overtures to China and Japan in particular.
The government and the World Bank forecast 2018 GDP growth to repeat above 5%, after commodity export recovery and increased capital spending offset tepid consumption last year. The trade surplus from coal, natural gas and palm oil sales hit a five year high at almost $12 billion, expanding reserves to $130 billion to cover eight months imports. The budget deficit came in barely under the statutory 3% ceiling, as Finance Minister Sri Mulyani Indrawati admitted tax targets were too ambitious to raise inflows to 15% of GDP, subpar by emerging market standards She said stricter enforcement, combined with simpler filing procedures, would not relent during the election season, and claimed that the broader anti-bureaucracy campaign at the core of Jokowi’s blueprint led to a 12% FDI jump in rupiah terms in the third quarter of 2017.
However natural resource nationalism is a pervasive influence smothering technocrat reassurance, and continues to scuttle multinational company plans. US miners Newmont and Freemont had to sell stakes and expand local investment, and state-owned Pertamina swallowed foreign energy assets. To fund these acquisitions, Indonesian public and private firms have accumulated foreign debt, which was up 9% to $350 billion or one-third of GDP last year according to the central bank. The government had $60 billion in bonds outstanding, 40% of the Emerging Asia total, as of last June and state enterprises have jumped in with rupiah-denominated “Komodo” issues to pay for deals and infrastructure projects the budget does not cover. The President’s $350 billion road, water and oil and gas development package quickly reached domestic limits with credit rising annually at a below 10% cautious pace, despite benchmark interest rate cuts through mid-2017. Banks were burned previously by state-directed corporate and personal lending, and are working to strengthen franchises with inflation in the 3-4% range and the currency steady at 13,500/dollar under regular intervention and tight trading rules.
The Financial Services Authority head Wimboh Santoso, formerly with the IMF, is now on a mission to attract additional outside Asian bank lines and presence to fill the gap, and the central bank recently opened a representative office in Beijing toward this end. The 40% international ownership lid dates from 2012, when Singapore’s DBS tried to gain control of high-profile Bank Danamon and was rebuffed. Japan’s MUFG in December agreed to buy it in progressive slices, first at 20% for $1 billion with an eventual goal of a complete takeover at $6 billion, provided Indonesian regulators waive the limit as they have for smaller deals. Santoso will decide the parameters and timeline and said he expects a “quantum leap” in products and services for approval, in contrast with the Jokowi era’s small financial sector bound. to date.
Tunisia’s Demonstrated Addled Adjustments
2018 February 4 by admin
Posted in: MENA
After a 7% MSCI gain in 2016 to match rival Morocco, Tunisian shares were spooked early in January as nationwide protests again erupted on the seventh anniversary of the previous Ben Ali regime’s ouster to coincide with popular anger against staple price hikes to curb the budget deficit under the IMF program, where the second review to release $1 billion was delayed over lackluster results. Security forces arrested hundreds of participants including opposition party activists, as the prime minister acknowledged grievances with insistence that low-income subsidies would be preserved. The Fund compiled a defense of its policies under the $3 billion 4-year arrangement, which succeeded the original Arab Spring one, in the form of a question and answer list admitting “short-term hurt” with fiscal measures against the “unsustainable” wage bill in particular, among the world’s highest, which accounts for half of spending. They also increase VAT on luxury items but keep basic food product protection, with recommendations to place pension and health services on sounder financial footing. Structural reforms such as state bank and enterprise restructuring have progressed at the same time to enable likely first quarter Board approval of the next installment, the text suggests. Following the pattern in North African neighbors Egypt and Morocco, which recently widened its fluctuation band, the authorities will consider greater exchange rate flexibility and dinar deprecation to aid competiveness, especially with external debt at 80% of GDP with reserves down to three months imports. The official salary adjustment emphasizes voluntary exit and early retirement rather than layoffs, and social spending like cash transfers for medicine and education are maintained while the fuel price hike targets wealthier households, according to the analysis. Anti-corruption and business climate improvement steps are in the mix, with new investment and banking laws despite a controversial amnesty for company and individual repatriation of questionable wealth accumulated under the old government. Financial inclusion is a supplementary focus to embrace micro and small firm credit, digital payment and central scoring and information bureaus. The IMF points out that it charges 3%, half the yield on Tunisia’s 2017 Eurobond, and that 30% youth unemployment is a paramount priority that can best be tackled through the program’s creation of private sector productive jobs.
The month before the EU was under fire for keeping the country on a tax haven blacklist as French President Macron prepared for an end-February trip since special rules remained for exports and financial services. It was named along with fifteen other “non-cooperative” jurisdictions, and the Tunisian President condemned the action as blocking transition to a “21st century state. ” The UAE, where shares dropped 1% on the MSCI index last year as one of the few losers, was also on the roster for missing a deadline for tax information sharing. Dana Gas was an exception to the exchange damage, with a double-digit surge on apparent victories in contractual disputes. It won a $2 billion arbitration claim against Iraq’s Kurdistan region for non-payment, and local courts may uphold its failure to honor a $700 million sukuk which lawyers argue was sharia-non-compliant despite an English tribunal ruling for creditors like Black Rock and Goldman Sachs. Appeals may drag on for years placing deals and the industry at mutual risk pending definitive divinity scholar direction, according to experts.
The Seamless Rally’s Frayed Fabric
2018 February 4 by admin
Posted in: General Emerging Markets
Emerging bond and stock market performance in 2017 exceeded the most optimistic early year scenarios, largely focused on feared global monetary and trade squeezes that proved overwrought and quickly faded to pave the way for uniform rallies. Benchmark indices were up double-digits, led by the MSCI’s 35%, with almost all country constituents in core and frontier and local and external measures along for the ride in a pattern last seen a decade ago right before the global financial crisis. Then a Shanghai Stock Exchange “shock” was originally felt in New York and other centers before the mortgage meltdown.
Combined investment fund flows last year at $200 billion mirrored the previous peak, with ETFs that have since mushroomed accounting for respective 10% and 25% portions of debt and equity allocation. Better than expected corporate earnings and average GDP growth, again approaching the 5% level of boom periods with higher exports and domestic demand, bolstered enthusiasm as a mix of positive underlying story and low-return advanced economy aversion. However the embrace did not distinguish between asset classes and leaders and laggards within them for a longer term winning strategy, and overlooked banking system and geopolitical icebergs lurking beneath the surface. Financial stability may again be a prominent theme after years of post-crisis relief, as private sector leverage rings alarms and the public sector running steeper fiscal deficits has limited rescue space.
Global public goods can also be targeted in combination on issues like climate, health, migration and financial crisis. Capital and leverage can be scaled up to mobilize trillions of dollars for infrastructure and other needs, and portfolios can be turned over to the private sector at return and management thresholds. Shareholder oversight should not be limited to individual institutions and incorporate competing and complementary missions through UN bodies. The next two decades will see history’s biggest urban expansion and landmark developing world demographic transition, especially with Africa’s youth bulge. The banks’ “value proposition” is to stay a trusted partner able to offer capacity and reform advice, long-term funding, and global and regional expertise and help when economic instability spreads. Pure financial transfers barely register in middle-income countries where they are less than 1% of private flows, but “development solutions” remain in demand. The World Bank’s net allocation is now lower than regional counterparts, and clients seek input on cross-cutting themes like connectivity, small business formation and inclusion and inequality. Donor harmonization was pledged in the Rome Declaration 15 years ago but application has lagged, with the new Asian Infrastructure Bank trying to avoid uncorrected overlapping and onerous safeguards. Collaboration on public-private partnerships, evaluation and procurement has increased but core agendas are still at odds and often redundant, according to the filing. Shared country and sector strategies, research and impact measurement are viable, and will facilitate the so-called cascade effect for commercial finance as little used instruments like guarantees are more widely deployed. Regular asset sale programs should in turn be scheduled to release original capital and prevent constant shareholder calls.
In fragile states reconstruction should not be delayed over constitutional and electoral formulas and be supported mainly by grants. Administrative procedures should be more flexible and bank staff should handle the load instead in “low capacity” places. Debt sustainability risk is high or moderate in 30 chiefly African countries that got official relief and now tap external bond markets, and management complexity must take into account rollovers, contingent liabilities and other aspects where MDBs can offer global lessons and tracking mechanisms. Advanced emerging markets still may seek public finance at the sub-national level and policy dialogue and peer convening power where private debt and equity sources do not engage. The Bretton Woods lenders have not been thoroughly reviewed for 75 years and lack a “periodic ambition and mandate inventory. ” The report calculates that their $40 billion base can be multiplied the next decade for $2 trillion in resources under far less conservative loan/asset ratios. Individual banks have their own comparative advantages such as the EBRD in energy and AfDB on water and topical rather than geographic focus can define future relationships from high-level summits to daily communications as a tangible near-term goal, it concludes.
South Asia’s Bulging Belt Lashes
2018 February 24 by admin
Posted in: Asia
China’s multi-trillion dollar hard and soft infrastructure investment Belt and Road Initiative (BRI), officially entering its fifth year, was again in the spotlight at the Davos World Economic Forum, where Asian portfolio managers tried to assess stock market recovery prospects in major recipients Pakistan and Sri Lanka in particular. Their MSCI component indices lost 21% and 1% respectively in 2017 as all other Asian exchanges tallied double-digit gains. A recent paper by the Washington-based Center for Strategic and International Studies (CSIS) noted that Beijing loaned Colombo $1. 3 billion for a port multilateral development banks refused, and then took an 80 % equity stake in lieu of unpaid interest as part of an $8 billion portfolio in the country ahead of 2019 presidential elections. Pakistan’s traditionally close commercial and diplomatic ties, especially as the US plans to cut back on economic assistance in anti-terror cooperation protest, have strengthened with a $60 bilateral aid and building program.
However Sri Lanka’s high debt, along with corruption scandals and political standoff, forced recourse to the IMF in 2016, and Pakistan is expected to return there imminently without additional backstop from more cash-strained Gulf donors. Currencies have plummeted in both places to aggravate food and fuel-price driven inflation, and the BRI cannot mask leadership doubts and fiscal and monetary policy lapses.
The CSIS analysis points out that Chinese projects barely benefit local contractors, as their own companies get 90% of funding. State-owned construction firms in particular, at seven of the world’s ten largest in 2017, can draw on massive size and subsidies. From 2000-2014 development bank credit totaled $350 billion, three quarters on commercial terms, with focus on the power and transport industries. In contrast with Western providers China’s approach is “centralized and flexible,” with unified agency decisions and relaxed environmental, social and governance standards. Natural resources are accepted for payment instead of cash, and capital outflow restrictions are not as strict for BRI deals, according to the document. It adds that large infrastructure schemes are unlikely to be completed on time or budget, and typical Chinese labor over-reliance will spark backlash.
In Davos Pakistan’s Prime Minister Shahid Khaqan Abbasi dismissed debt trap concern over the Economic Corridor with China, which he insisted would proceed under mutual “sustainability” principles and was designed to stimulate all foreign investment with energy and security improvements. However in December water authority officials scuttled a proposed $15 billion dam project over Beijing’s onerous financing demands, and railway deals in Karachi and elsewhere were also put on hold. In January the government’s own debt policy statement acknowledged deterioration in external servicing ratios across-the-board as the total hit $85 billion, versus $15 billion in foreign exchange reserves covering just three months imports. After successfully placing Eurobonds in conventional and sukuk form late last year, rating agency Moody’s warned that further rupee depreciation and the persistent 3-4% of GDP current account deficit would hurt “affordability. ”
In Switzerland the Prime Minister spurned the prospect of immediate elections and IMF program application, as he previewed a tax amnesty to extend collection beyond the current less than 1% of the population and restrain public debt buildup at the 65% of GDP danger zone. He pointed to information technology as an emerging domestic demand driver buttressing traditional garment exports and remittances for 5% predicted economic growth this year, according to the World Bank. Double-digit credit increases and good monsoon rains should support near-term performance, but analysts caution that capital account trouble could materialize under currency flight and debt reimbursement pressures.
Sri Lanka’s official growth forecast is for the same pace, as foreign direct investment was estimated to double to $1. 5 billion in 2017 amid good agriculture and tourism earnings. Going into February parliamentary polls President Maithripala Sirisena and his minority party are struggling with popular outcry over tax hikes and 8% inflation, with staple coconut prices doubling. The IMF arrangement aims to limit the fiscal gap to 5% of GDP, which the central bank has historically bridged through money printing. Domestic debt maturities peak this year and foreign ones over 2019-22, according to experts, but the President announced in January that he did not have a detailed accounting for $60 billion or 90% of previous external loans, a claim that stretched both credulity and comfortable Belt size.
Central American Remittances’ Premium Protection Stakes
2018 February 24 by admin
Posted in: Latin America/Caribbean
With the US planning to lift “temporary protection status” for Northern Triangle El Salvador, Honduras and Nicaragua and Haiti migrants, remittances jumped 8% to $75 billion for the seventeen countries in the Inter-American Dialogue database last year. The pace was a multiple of 1% regional GDP growth and mirrored export increase. For Central America and the Caribbean 3. 5% growth was due to a 15% remittance uptick, and the numbers reflected continued North American labor demand as well as dollar depreciation in Mexico, the Dominican Republic and Costa Rica. The violence-prone Triangle area has been in recession for a decade and families continue to head to the US border with apprehensions also declining. In Guatemala as an example 15% of the Western Highlands population left and transfers were up 17% according to the central bank. One-quarter of El Salvador’s citizens want to leave, surveys show, and in the Dominican Republic despite greater stability the number of transactions has jumped. Haitian emigration on the eighth anniversary of the record earthquake is toward Canada and South America as well, particularly to Brazil and Chile, which now hosts 100,000 in contrast with 5000 before the event. Mexican remittance growth was steady at 6%, but the weaker dollar may have prompted slightly lower volume. The individual principal amounts sent roughly reflect the 2016-17 aggregate changes, but deportation fears may be forcing more savings on hand in case of such action. The flows contribute in the range of 5-35% of GDP, and work abroad is often the main alternative to informal employment at home, with substandard pay and labor protection. In El Salvador and Haiti immediately targeted for status termination, they account for one-third of national income, and Haitian migrants with the TPS designation are 6% of the total, the Dialogue report notes. President Trump allegedly used an epithet to describe the poorest hemisphere country, as a 2017 survey of five US cities revealed mounting Latino anxiety over potential law enforcement crackdown or new taxation.
On average a dozen payments are transmitted annually and only one-tenth are through the internet. With a tax 40% polled would resort to informal services, and one-quarter plan to cut amounts. One-third of immigrants think they will be deported, and 60% do not expect home government support. Over half would be open to a fine to normalize status, and the same portion claimed jobs were harder to get with the Administration’s tougher despite the healthy US economy. 70% of respondents believe that the door will be shut altogether to legitimate refugees as the provisional shelter program also lapses. Honduras’ external bond was shaky as President Hernandez was inaugurated for a second term after a disputed election fostering street protests and a security force response with live ammunition. The opposition candidate, a sports broadcaster, cited computer manipulation of his apparent victory and national strikes were organized against “dictatorship” as the Organization for American States urged a rerun. Chile may harden its line against Haitians after President Pinera’s second term win, which upgraded the growth forecast to 3. 5% on boosted private sector confidence and modest rate cuts alongside but he may turn previous social spending promises to rubble.
Kazakhstan’s Sullied Diplomatic Splash
2018 February 17 by admin
Posted in: Asia
Kazakhstan’s MSCI frontier stock component, after a 70% gain, and dollar bond prices at 130 cents both sputtered into 2018 as President Nursultan Nazarbaev marked twenty-six years at the helm with high profile foreign investor energy and banking clashes despite a triumphal US visit. In Washington President Trump dismissed corruption and money laundering references to the long reign with his own campaign under the microscope for Russia and neighboring ties, and in New York while chairing the monthly seat rotation on the UN Security Council, the Kazakh chief was praised by Secretary-General Antonio Guterrres for Central Asia development and anti-terror initiatives focusing on infrastructure and drug crime. While there Wall Street money managers also probed details of scheduled sovereign wealth fund partial state enterprise sales to include the airline and natural resource holdings.
European counterparts had previously joined the parade after the EU inked a Partnership and Cooperation Agreement, which aims at bilateral “WTO-plus” free trade slashing both tariff and non-tariff barriers. The pact came on the heels of the country’s 15 place jump on the World Bank’s Doing Business ranking, despite staying in the bottom quartile of Transparency International scores. The European Bank for Reconstruction and Development also signed a new 3-year program memorandum stressing small business and privatization support. However these official achievements were blemished by simultaneous private antagonism after the local unit of US electricity operator AES was seized for one dollar, and Bank of New York Mellon was forced to freeze $22 billion or half of Kazakhstan national fund assets to satisfy a possible Moldovan oil and gas investor claim. At the same time banking instability at home spiked when the ninth largest institution, RBK, was rescued after a depositor run for reported fraud, at an estimated initial $1. 5 billion tab. The sector was still coming to grips with the forced merger of the two state behemoths Halyk and Kazkommertsbank, as bad balance sheets linger a decade after the original crisis despite the President’s positive diplomatic headlines.
In his January state of the nation speech President Nazarbayev repeated financial system cleanup and anti-corruption priorities without hinting at an executive succession preference or timeframe, even though parliament in principle gained relative power under 2017 constitutional amendments. He continues to dismiss cabinet members and prime ministers at will, and unilaterally decided on an alphabet switch from Cyrillic to Latin script creating widespread academic and professional confusion. After Kyrgyzstan’s President reportedly insulted him the border was closed temporarily, and Astana delayed its neighbor’s membership in the Russia-led Eurasia Economic Union. Last year GDP growth came in at 4% on 7% inflation, and the central bank recently reduced the base rate to 9. 75% as the tenge firmed around 325/dollar. Oil price rebound spurred a 25% trade and an almost 10 million barrel/day output rise, with Kazakhstan now the top over-producer in the OPEC and allies’ global agreement. The Economy Ministry said hundreds of projects were completed under the 5-year privatization plan, as the new Astana International Financial Center based on advanced economy legal and operating standards began registering companies in partnership with the Shanghai Stock Exchange and NASDAQ.
The dedicated offshore framework must contend with the harsh image and arbitrary rule displayed several months ago in the AES saga, where the Fortune 200 power company was stripped of control over two hydro-facilities run since the 1990s. It spent hundreds of millions of dollars installing a state of the art electricity grid only to have a contract compensation clause ignored, when the government demanded ownership and offered one dollar for alleged violations instead of the $90 million AES calculates is due. The debacle was soon followed by the wealth fund asset freezes in the US and Europe in long-running Moldovan investor actions against the state, after it confiscated petroleum fields in 2010. The plaintiffs won a $500 million international arbitration award and tried to enforce payment in Belgian and Dutch courts with Kazakhstan filing counterclaims, and they threaten to pursue future compensation in the giant Kashagan tract if the damages are not met. With over $20 billion in reserves off limits, the Nazarbayev administration will have difficulty mustering additional bank rehabilitation lines, and financial markets will remain wary pending development of a successor plan emphasizing instead governance and management overhaul. .
Turkey’s No Good Cresting Credit Craze
2018 February 17 by admin
Posted in: Europe
Turkish stocks were pressed to sustain their 2017 35% MSCI gain as political opposition to President Erdogan further solidified with a successful gathering organized by the new Iyi (good) party founded by a former interior minister expelled from the ruling AKP, and the central bank hoisted rates 50 basis points to stem near 15% inflation from the state-credit turbocharged economy expanding 7% in the third quarter. Investors were also spooked by a senior Halkbank executive New York conviction in an illegal gold for oil trading scheme with Iran violating sanctions, which may result in SWIFT network dollar-clearing curbs. Iyi’s head Aksener fashioned a conservative cultural anti-terror platform which promotes women’s rights and criticizes the presidency’s unchecked powers. Over 50,000 have been jailed and hundreds of thousands of government employees were removed under broad security authority after the botched putsch, and waves of educated professionals otherwise fled abroad. The US has been accused of aiding plotters and of encouraging a Kurdish stronghold along the Syrian border, while Turkish embassy personnel were accused of beating protesters in Washington during a bilateral summit. Visa services were suspended between the two countries in the aftermath, and overtures to Russia and China have increased on commercial and military cooperation. Western human rights groups have blasted the regime’s strong arm tactics, including confiscation of leading private company assets, as well as harsh refugee treatment despite hosting over 3 million escaping Syrians. With emergency law tourism is down despite the softer lira toward 3/dollar, and the current account deficit again approaches 5% with booming domestic demand, on household spending up 12% annually. Turkish business has borrowed $215 billion overseas, and the government will keep weaker firms from assuming more debt under recent changes. Banks likewise depend on foreign lines, and their position may be more precarious with global monetary tightening and lingering exposure from the guarantee fund push.
Refugee labor market practice was condemned in a December report by advocacy organization Refugees International calling for “sustainable solutions” after seven years of Syria’s civil war. Despite government and EU assistance the population must “fend for itself,” and can only find informal economy work with substandard wages and conditions with few permits issued under a 2016 program. Over 5000 Syrian-owned businesses have opened, but employees otherwise face prohibitive administration and fees. One million are in Istanbul, and over 90% are in urban centers with limited language and skills access. They are under “temporary protection” and must live in the city where registered and wait six months to apply for work approvals, now at 15000 total since introduction. Cash transfers are minimal for family support, and households typically must also send money to relatives in Syria. An estimated 80% of refugees are in the underground sector, and 40% of children are out of school in such labor, particularly in the low salary textile industry. The survey documented scarce permit information through community centers and employer hiring appetite with the minimum wage, social security and other charges attached. Few refugees speak Turkish and they encounter long delays in obtaining ID cards prior to seeking permits as well as discrimination in renting which can literally undermine prospects for roofs over their heads, according to the analysis.
The World Bank’s Circuitous Cyclical Bounce
2018 February 10 by admin
Posted in: IFIs
The World Bank’s January Global Economic Prospects report was upbeat over immediate and medium-term developing world growth, with the average put at 4. 5% this year, but noted long-range productivity drags which could dent the story without labor, education and business climate breakthroughs. Recovery was clear in 2017 with commodity price upswings and big countries like Brazil and Russia out of recession, and the low-income group will outperform at 5. 5% as they are in an earlier phase of capital accumulation with favorable demographic trends. “Disorderly” financial markets remain a risk with steeper borrowing costs hurting corporate balance sheets in particular, alongside geopolitical and trade protection threats. For commodity importers output gaps are near zero, and fiscal and monetary policies generally may be exhausted in extending the cycle placing the onus on structural changes that boost investment quality and living standards. Chinese growth will drop half a point to under 6. 5% in 2018, as housing slowdown and bank regulatory crackdown take hold, and ongoing dangers include state corporate debt above 250% of GDP and the aging disproportionately male population. Global trends have been positive with trade volume due to rise 4% annually despite value chain stabilization and spreading tariff and procedural barriers on an estimated three-quarters of G20 member exports. Advanced economy gradual central bank rate and balance sheet normalization has been “accommodative,” with portfolio and banking allocation driving cross-border capital flow rebound with FDI “broadly stable. ” However European bank lines are still “subdued” as they regroup on the continent under common supervisory norms, despite 20% oil and metals price jumps in client countries last year while food values fell slightly.
Industrial production as measured by PMIs is at multi-year peaks, and lower inflation has supported private consumption. Gulf and African energy exporters have struggled with price fluctuations and delayed budget and exchange rate adjustments, with security and social tensions a byproduct. In India investment has been “soft”, while EU structural funds aided Hungary and Poland. Mexico faces NAFTA renegotiation, but smaller Asian economies benefited from China’s Belt and Road infrastructure scheme. Poorer countries reduced poverty, but in one-third per capita income shrank with political upheaval worsening in places like the Democratic Republic of Congo. In this category fiscal and current account deficits fell, but government debt went the opposite for an average 55% of GDP. More trade-dependent emerging markets will reap gains from stronger industrial world investment, but “stretched” asset valuations raise doubts, and impaired credit quality, combined with higher leverage and historic low risk compensation, could spur corporate bond reversal. China could be especially susceptible after a prolonged debt boom and financial stress there would have wide-ranging “adverse” effects. Bank profitability is solid but capital buffer erosion is pronounced in India, Russia, South Africa and elsewhere. The UK-EU Brexit standoff, Korea and Middle East conflict, bilateral and regional trade pact modification, and international migration waves are other obstacles. Oil prices could slip again as green energy alternatives become less expensive and easily connected, and expansionary Chinese fiscal policy may spike public debt as sustainability is a core issue in the larger universe, especially if sovereign contingent liabilities are counted. Better skills and training are vital to future economic health, but the prescription could also worsen inequality in coming cyclical turns, the Bank concludes.
Indonesia’s Flailing Floor Plans
2018 February 10 by admin
Posted in: Asia
The Jakarta Stock Exchange’s tragic floor collapse, injuring visiting high school students, prompted management promise of an immediate “audit” into its cause at a time when investors are probing 2017’s lagging 20% MSCI Index gain against regional counterparts. While they do not consider the incident a possible metaphor for outright cratering, this year’s political, economic and banking system path will remain bumpy to block outperformance. Output passed $1 trillion, but 5% growth is below the 7% President Jokowi pledged after winning office. He faces re-election in 2019 and provincial polls this June, with rating agency Moody’s noting the calendar’s “likely slower reform momentum. ” Rival Fitch upgraded the sovereign to BBB in December and praised monetary policy limiting volatility and capital outflows, but also cited poor government revenue collection and lingering “structural weakness. ”
The President brought the Golkar party into the ruling coalition to advance his anti-corruption and infrastructure development agenda, and parliamentary speaker ally Setya Novanto now confronts bribery charges along with other members of the legislative and commercial elite. He has used several ruses to evade trial, although his behavior follows a 2015 pattern when a tape recording exposed an extortion attempt toward miner Freeport McMoRan. Jokowi was already in political peril after his protégé lost the Jakarta governor’s race amid allegations of Islamic blasphemy, as religious controversies continue to interfere with economic modernization initiatives including industrial sector external opening. Conservative clerics and protectionist advocates oppose further foreign entry into banking, where the ownership cap is 40%, despite administration overtures to China and Japan in particular.
The government and the World Bank forecast 2018 GDP growth to repeat above 5%, after commodity export recovery and increased capital spending offset tepid consumption last year. The trade surplus from coal, natural gas and palm oil sales hit a five year high at almost $12 billion, expanding reserves to $130 billion to cover eight months imports. The budget deficit came in barely under the statutory 3% ceiling, as Finance Minister Sri Mulyani Indrawati admitted tax targets were too ambitious to raise inflows to 15% of GDP, subpar by emerging market standards She said stricter enforcement, combined with simpler filing procedures, would not relent during the election season, and claimed that the broader anti-bureaucracy campaign at the core of Jokowi’s blueprint led to a 12% FDI jump in rupiah terms in the third quarter of 2017.
However natural resource nationalism is a pervasive influence smothering technocrat reassurance, and continues to scuttle multinational company plans. US miners Newmont and Freemont had to sell stakes and expand local investment, and state-owned Pertamina swallowed foreign energy assets. To fund these acquisitions, Indonesian public and private firms have accumulated foreign debt, which was up 9% to $350 billion or one-third of GDP last year according to the central bank. The government had $60 billion in bonds outstanding, 40% of the Emerging Asia total, as of last June and state enterprises have jumped in with rupiah-denominated “Komodo” issues to pay for deals and infrastructure projects the budget does not cover. The President’s $350 billion road, water and oil and gas development package quickly reached domestic limits with credit rising annually at a below 10% cautious pace, despite benchmark interest rate cuts through mid-2017. Banks were burned previously by state-directed corporate and personal lending, and are working to strengthen franchises with inflation in the 3-4% range and the currency steady at 13,500/dollar under regular intervention and tight trading rules.
The Financial Services Authority head Wimboh Santoso, formerly with the IMF, is now on a mission to attract additional outside Asian bank lines and presence to fill the gap, and the central bank recently opened a representative office in Beijing toward this end. The 40% international ownership lid dates from 2012, when Singapore’s DBS tried to gain control of high-profile Bank Danamon and was rebuffed. Japan’s MUFG in December agreed to buy it in progressive slices, first at 20% for $1 billion with an eventual goal of a complete takeover at $6 billion, provided Indonesian regulators waive the limit as they have for smaller deals. Santoso will decide the parameters and timeline and said he expects a “quantum leap” in products and services for approval, in contrast with the Jokowi era’s small financial sector bound. to date.
Tunisia’s Demonstrated Addled Adjustments
2018 February 4 by admin
Posted in: MENA
After a 7% MSCI gain in 2016 to match rival Morocco, Tunisian shares were spooked early in January as nationwide protests again erupted on the seventh anniversary of the previous Ben Ali regime’s ouster to coincide with popular anger against staple price hikes to curb the budget deficit under the IMF program, where the second review to release $1 billion was delayed over lackluster results. Security forces arrested hundreds of participants including opposition party activists, as the prime minister acknowledged grievances with insistence that low-income subsidies would be preserved. The Fund compiled a defense of its policies under the $3 billion 4-year arrangement, which succeeded the original Arab Spring one, in the form of a question and answer list admitting “short-term hurt” with fiscal measures against the “unsustainable” wage bill in particular, among the world’s highest, which accounts for half of spending. They also increase VAT on luxury items but keep basic food product protection, with recommendations to place pension and health services on sounder financial footing. Structural reforms such as state bank and enterprise restructuring have progressed at the same time to enable likely first quarter Board approval of the next installment, the text suggests. Following the pattern in North African neighbors Egypt and Morocco, which recently widened its fluctuation band, the authorities will consider greater exchange rate flexibility and dinar deprecation to aid competiveness, especially with external debt at 80% of GDP with reserves down to three months imports. The official salary adjustment emphasizes voluntary exit and early retirement rather than layoffs, and social spending like cash transfers for medicine and education are maintained while the fuel price hike targets wealthier households, according to the analysis. Anti-corruption and business climate improvement steps are in the mix, with new investment and banking laws despite a controversial amnesty for company and individual repatriation of questionable wealth accumulated under the old government. Financial inclusion is a supplementary focus to embrace micro and small firm credit, digital payment and central scoring and information bureaus. The IMF points out that it charges 3%, half the yield on Tunisia’s 2017 Eurobond, and that 30% youth unemployment is a paramount priority that can best be tackled through the program’s creation of private sector productive jobs.
The month before the EU was under fire for keeping the country on a tax haven blacklist as French President Macron prepared for an end-February trip since special rules remained for exports and financial services. It was named along with fifteen other “non-cooperative” jurisdictions, and the Tunisian President condemned the action as blocking transition to a “21st century state. ” The UAE, where shares dropped 1% on the MSCI index last year as one of the few losers, was also on the roster for missing a deadline for tax information sharing. Dana Gas was an exception to the exchange damage, with a double-digit surge on apparent victories in contractual disputes. It won a $2 billion arbitration claim against Iraq’s Kurdistan region for non-payment, and local courts may uphold its failure to honor a $700 million sukuk which lawyers argue was sharia-non-compliant despite an English tribunal ruling for creditors like Black Rock and Goldman Sachs. Appeals may drag on for years placing deals and the industry at mutual risk pending definitive divinity scholar direction, according to experts.
The Seamless Rally’s Frayed Fabric
2018 February 4 by admin
Posted in: General Emerging Markets
Emerging bond and stock market performance in 2017 exceeded the most optimistic early year scenarios, largely focused on feared global monetary and trade squeezes that proved overwrought and quickly faded to pave the way for uniform rallies. Benchmark indices were up double-digits, led by the MSCI’s 35%, with almost all country constituents in core and frontier and local and external measures along for the ride in a pattern last seen a decade ago right before the global financial crisis. Then a Shanghai Stock Exchange “shock” was originally felt in New York and other centers before the mortgage meltdown.
Combined investment fund flows last year at $200 billion mirrored the previous peak, with ETFs that have since mushroomed accounting for respective 10% and 25% portions of debt and equity allocation. Better than expected corporate earnings and average GDP growth, again approaching the 5% level of boom periods with higher exports and domestic demand, bolstered enthusiasm as a mix of positive underlying story and low-return advanced economy aversion. However the embrace did not distinguish between asset classes and leaders and laggards within them for a longer term winning strategy, and overlooked banking system and geopolitical icebergs lurking beneath the surface. Financial stability may again be a prominent theme after years of post-crisis relief, as private sector leverage rings alarms and the public sector running steeper fiscal deficits has limited rescue space.
In stock markets by region Asia outstripped Latin America and Europe in the core universe, with MSCI’s addition of Chinese “A” shares and buoyant company profits in the global tech cycle were key drivers. These factors neutralized continued worry over China’s banking stress, corporate debt overhang, and capital outflows which were prominent topics at the Central Economic Work Conference going into 2018. Authorities have already announced crackdowns on shadow “entrusted loans,” state enterprise leverage, and bank card holder dollar deposit withdrawals, and signaled further moves with financial stability a Party priority. In contrast with 2008, economic and credit spillovers from potential crisis would now slam emerging market bonds as well, where foreign investor corporate and sovereign exposure ranks near the top globally in volume trading surveys by the industry association EMTA. Asian neighbors Korea, Malaysia and Thailand are grappling with high household as well as business debt levels, regularly drawing warnings from the IMF and the BIS, which will be tested this year as allocation turns more selective, according to the latest Bloomberg fund manager polls. Korea’s central bank stood out last year by hiking interest rates and imposing credit card “macro-prudential” curbs to shrink OECD-leading 150 percent of GDP personal leverage.
In Europe, Russia lagged with a barely positive MSCI result despite low valuations, as it may face more Western sanctions for election interference, with the US Treasury Department considering a government bond buying ban. It took over systemically-important private banks and had to close hundreds of others for prudential violations. Turkey’s 35% rise was at the opposite extreme, but was due to post-coup attempt official loan stimulus overheating the economy and stretching the banking system, which has to rollover heavy foreign exchange obligations. Foreign investors as the largest owners trimmed local bond positions in Hungary and Poland, as they recoil at populist administrations courting EU condemnation and aid suspension, and fear that domestic institutional investors lack backup capacity after private pension fund shutdowns.
Latin America has a nonstop 2018 election calendar with presidential contests in Brazil, Colombia and Mexico, with the main parties and their standard bearers offering scant commodity diversification and productivity raising platforms under scandals and criminal investigations. Brazilian banks, including the development BNDES arm, continue to deal with large corporate borrower restructurings, such as with telecom firm Oi. Argentina’s economic policy turnaround and world capital market re-entry under President Macri, which resulted in record borrowing and a near 75% MSCI Frontier Index bounce in 2017, is offset by Venezuela’s implosion under a harsher socialist regime bringing hyperinflation, debt default and a singular humanitarian catastrophe.
Frontier market stumbles in the Middle East and Africa left the composite gauge 10% below MSCI’s main roster, as Gulf and Southern African components suffered respectively from the Qatar boycott and South Africa-Zimbabwe political transition jitters, which have also hurt bank liquidity and profitability. A big warning to the overall asset class is the Institute for International Finance’s lending conditions survey stuck around the neutral 50 mark, which fund managers have yet to flag it for future momentum drag. They will better pick their spots in the coming months, and although stock returns likely will continue long-term catch up with bonds, variation will widen by geography and development stage through the financial sector health filter.
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Iran’s Botched Banking Rescue Roar
2018 January 29 by admin
Posted in: MENA
The Tehran Stock Exchange’s one-year performance in dollar terms showed an 8% gain into December, one quarter the almost 35% MSCI emerging market surge, as mainly working class protests first erupted in the second city of Mashhad over pocketbook economic and credit hardship. Just before the massive “bread and jobs” rallies the International Monetary Fund in its annual Article IV consultation underscored the urgency of bank bad loan removal and recapitalization, amid preliminary steps to place unregulated lenders under central bank control and shut them down if violating prudential rules. They have been closed suddenly without public notice, and small savers lured by higher rates beyond the mandatory 15% ceiling have lost or been unable to access accounts without a formal deposit insurance system.
Many of these underground providers have ties to the Revolutionary Guard(IRGC), which dominates the economy with major stakes in stock exchange-listed companies, and their collapse coincided with first-ever budget disclosures that it is in line for multi-billion dollar allocations while consumer subsidies face cutbacks to achieve fiscal balance. The IMF mission pointed out that additional government debt to cover bank cleanup will reinforce pressure and recommended ending tax exemptions benefiting the giant bonyad religious foundations in particular. President Hassan Rouhani won reelection campaigning for financial system modernization and integration, but has been stymied by officials and legislators in the revolutionary “old school” Supreme Leader’s camp. Their resistance has delivered a body blow to income improvement aspirations under nuclear deal sanctions relief, which the US may now roll back under the Trump administration’s tougher “decertification” stance. It urged the demonstrators to continue regime confrontation and prepared to reinforce IRGC punishment for military action in Syria and the region, while foreign investors from Asia, Europe and the Middle East focus equally on the banking crisis stalemate.
The President reprised his second term mantra after the protests spread nationwide by declaring the need for “major economic surgery” and referring to illegal credit firms as a “tumor.
