No More Learning

Latin America also has large short-term obligations, as political instability stalks the Middle East and reserve deterioration is widespread in Africa. The policy response to lagging capital inflows can be absorbed with currency flexibility, but potential “disruption” could justify spot and swap intervention as well as temporary access and prudential controls. Confidence may ultimately turn on a pro-active agenda for deepening private savings and financial markets at home, and advancing original G-20 commitments on monetary system cooperation and modernization. As a new Fed Chair takes over in Washington signaling further tapering which can trigger spillover the Congress again refused to pass the IMF’s 2010 quota increase involving no concrete additional appropriation with disorder reigning.

Belarus’ Fallow Fertilizer Folly
2014 February 6 by admin

Posted in: Europe
At the same time relations with Ukraine are reoriented, Russia has offered Belarus as an original Eurasia Economic Union member $2 billion in bilateral credit as a potash cartel collapsed in acrimony and kept the current account deficit at 10 percent of GDP with reserves down to less than two months’ imports. Growth has been only 1 percent on double-digit inflation as the IMF criticized salary increases and high directed hard-currency lending in its annual update. Half of advances are in dollars and NPLs are one-fifth the total, and $4. 5 billion in state bank and enterprise privatization plans have stalled as longer-term entry into WTO is contemplated. Public sector pay jumped 20 percent in 2013 and subsidized credit through the Development Bank amounted to almost 5 percent of output, undermining the balanced budget target. The Fund recommended deep cuts in these categories along with energy and transport tariff hikes for better cost recovery. The Lukashenko government insists that agricultural and housing funding should stay in place while conceding scope for VAT and other tax rises for fiscal equilibrium. Monetary policy has been erratic as the headline refinancing rate was slashed 500 basis points to 23 percent at mid-year as foreign currency reserve requirements and risk weightings were lifted sharply. Exchange rate flexibility has been “limited” with only 2 percent nominal depreciation, according to the report, which advised reduced intervention to correct overvaluation. It questioned a new high-yield rubel instrument insuring against devaluation and the continued lack of structural reform with pervasive price controls and official ownership and meddling in business. The regime argues for gradual implementation to preserve its “socially-oriented model” as it owes the Fund $1. 5 billion both in 2013 and 2014 from its previous post-2008 crisis program. Arrangements for another Eurobond were shelved as funding outreach continues to China and the Middle East along with Russia. IMF renewal is off the table with performance and policy lapses and international sanctions by the US and Europe in view of anti-democratic practice.

Elsewhere in the region Serbia’s Fund resumption has also been delayed indefinitely despite EU accession invitation, as the ruling coalition called snap elections amid festering fiscal and balance of payments woes. Gulf investors pledge outlays but they will not materialize soon enough to offset double-digit unemployment and dinar weakness. Croatia may be considering a request after another sovereign downgrade, and Slovenia was admonished to be “more ambitious” with budget-cutting in its Article IV evaluation to tackle the 80 percent of GDP public debt ratio with the initial EUR 3 billion bank recapitalization load. The eventual number may be double according to outside experts, and pension and subsidy reforms have barely begun as immediate bond refinancing was mainly through a confidential private placement. The economic contraction of over 10 percent in recent years is the largest in the Eurozone after Greece, with interconnected banks and companies lacking a durable fix beyond the cited “stop-gap solution. ”

Nigeria’s Dulled Diaspora Disposition
2014 February 3 by admin

Posted in: Africa
Nigerian equities retrenched in early January as President Jonathan entered his last year in office faced with oil sale corruption investigations and a 15 percent foreign reserve fall from the $50 billion peak to defend the currency corridor, as the debt management office prepared to tap diaspora investors in a $100-200 million placement after sukuk innovation. Another Eurobond is slated for the second half after last July’s successful effort amid a global capital outflow spike, and another year of 6. 5 percent GDP growth is forecast as the central bank reassures that reserves cover 11 months’ imports. It also intends to push the interest rate benchmark to single digits to spur private sector lending by the main half dozen banks accounting for almost 60 percent of system assets. Their capital adequacy ratio is 18 percent and NPLs are under 5 percent as the central disposal agency has absorbed post-2008 crisis portfolios. The recovery rally has attracted attention from prominent frontier investors like Templeton, but pan-African network Ecobank recently was condemned by regulators for poor corporate governance under its ousted chief executive. In West Africa, the bourse will launch cross-trading with Ghana and Cote d’Ivoire in March as the Finance Minister announced 2013 FDI at $7 billion led the Sub-Sahara category and a statistical revamp that could increase the economy’s size above South Africa’s. Energy industry reforms continue to advance slowly, but tax collection lags according to a World Bank report which placed the country at the bottom of payment ease rankings with 75 percent of small businesses escaping the net. The government has hired consultants McKinsey to close loopholes and boost compliance following a similar initiative in Ghana.

Officials there stand by the 2014 respective 7. 5 percent growth and 8. 5 percent of GDP fiscal deficit goals, even with rating agency doubts spawning downgrades. The stock market tops the region with a 55 percent annual gain on offshore energy enthusiasm and deal-making including the foreign takeover of major listing Fan Milk, despite the lackluster results at operator Tullow Oil. Over the next five years the industry aims for $20 billion in investment as domestic and external borrowing for infrastructure projects again raises sustainability questions and contributed to a 20 percent cedi slump against the dollar last year almost equal to the rand’s. In response the monetary authority has imposed new interbank trading rules to ensure two-way quotes and disclosure for all transactions, with international accounts due for further restrictions. In Kenya the exchange advance of 35 percent has been better supported by a firmer shilling-dollar level at 86, with the policy rate on hold at 8. 5 percent on single-digit inflation. The Treasury predicts 6 percent growth this year on steady agricultural exports and tourism despite the Westgate mall terrorist assault. IMF Director Lagarde in a visit cited the trajectory toward middle-income status the next decade as program renewal helps with hidden snares.

Russia’s Olympic Ambitions Ambush
2014 February 3 by admin

Posted in: Europe
Russian shares remained sluggish in January prior to the Sochi Winter Olympic Games debut as suicide bombers struck in nearby Volgograd and Caucuses rebels previewed further attacks on the costly $50 billion event, with private builders getting 70 percent funding from state bank VEB, which has also been tapped for $30 billion in recent bilateral loans to Ukraine, Belarus and Hungary. Oligarch-owned Basic Element and Interros are major participants and already have requested repayment and tax relief to recover their investments. The preparations have overshadowed $10 billion in consumer goods IPOs in the pipeline after standout 2013 performance in the sector, as headline inflation retreats toward the 5-6 percent target range. With GDP growth at just 1. 5 percent and the PMI below 50 the central bank has let the ruble go toward 35 to the dollar and signaled a full-floating regime by 2015 under new chief Nabiullina. As energy exports wane Gazprom has altered course to cut deals including long-term supplies to China and an EU compromise over monopoly allegations in addition to the Kremlin-ordered rollback in Ukraine’s natural gas prices as part of its December rescue package. It will also renegotiate terms with its Hungarian partner as Moscow separately offered $10 billion in credit for two nuclear reactors. The Kiev injection slightly improved negative MSCI Frontier trends and lifted reserves to $20 billion as the currency settled at 8. 3 to the dollar. Previous lines from Russia banks were reimbursed as the initial cross-border wave of $15 billion in Treasuries was subscribed, saving President Yakunovych from urgently turning to the EU and IMF before 2015 elections. The local banking system is one-third dollarized and NPLs are at 15 percent, and foreign parents trimmed their presence before the latest economic and political crisis with violent confrontations continuing between police and protesters in the main city square. Opposition party leaders continue to call for strikes and the government’s resignation despite the crackdown which has drawn the ire of US Senators demanding sanctions and a future veto on IMF support.

Turkey’s Prime Minister Erdogan is also under siege, with the stock market down 35 percent on the MSCI Index in annual terms and the lira approaching a 2. 5 to the dollar record low, as non-resident capital outflows persist under the weight of a deep corruption scandal and current account deficit. Cabinet ministers and regulatory bodies have been purged in a ruling Islamic coalition internal struggle as investigations continue into alleged construction company kickbacks for showpiece infrastructure projects. Credit card and luxury item curbs have been introduced in an effort to slow demand, which may leave GDP growth at 2-3 percent heading into local and presidential elections. The central bank has drawn on reserves for currency backing and allowed for occasional overnight tightening in its latest meeting, but refuses to raise interest rates outright in keeping with the Prime Minister’s attacks on that “lobby. ” Ratings agencies warn of sentiment reversal with the decade-old leadership alignment off its game finally.

Indonesia’s Throbbing Mineral Veins
2014 January 31 by admin

Posted in: Asia
Indonesian shares recovered traction early in January after last year’s worst Asia showing on more modest current account slippage at 3 percent of GDP, despite a Presidential ban on raw mineral exports until big operators like Freeport and Newmont ensure local processing capacity for additional value and jobs. The initial language was diluted so that nickel and bauxite shipments accounting for $2 billion in revenue would be the only commodities immediately affected. Dozens of firms laid off workers in anticipation of the moratorium, as China in particular moved to source supply from neighbors. Heavyweight listing Antam with a large foreign investor base was slammed, following bank selloffs on credit slowdown and the rupiah’s 25 percent plunge against the dollar. The central bank paused after almost 200 basis points in rate hikes, and fiscal policy should also be tight throughout the election period as fuel subsidies are pared modestly and net borrowing is covered by relatively unchanged 30 percent overseas holdings of domestic debt. Economic growth should reach 5 percent with stable oil import costs and smooth leadership transition, with the current Jakarta governor favored in opinion polls although not a declared candidate. The region’s other headline trouble spot India likewise got initial 2014 relief as retail inflation faded to single digits on lower food prices and non-residents returned to the bond market as the trade balance reflected gold demand barriers. Politics there too is on the boil as Rahul Gandhi was officially tapped to head the Congress Party list against current opposition front-runner Modi, and the new spoiler “Common Man” movement took power in the capital. About 125 previously stalled infrastructure projects worth $65 billion have been cleared by a government task force, as Mumbai opened a modern international airline terminal. Central bank chief Rajan has stressed a deleveraging theme with the main industrial conglomerates running up over $100 billion in debt which may aggravate the true bank NPL reading already at one-tenth of the total. On the Sensex consumer goods plays have come under pressure with GDP growth halved to 4. 5 percent and rule shifts in the drug and retail sectors.

Korea on the other hand dipped after 2013’s flat performance on tough currency intervention talk against the yen in particular after Samsung reported earnings erosion from the 15 percent higher won. Moody’s gave a stable mark to the banking system as developed world recovery should sustain 4 percent GDP expansion, according to official and private forecasts. On the frontier front Vietnam has made up last year’s small loss as the central asset company offers 5-year liquidity to compensate for credit pullback and real estate softness. Inflation is in single digits and the current account has moved to surplus, with foreign reserves estimated at $30 billion for the minimum 3 months’ import needs. Planned currency depreciation will again be 2-3 percent with a dollar influx foreseen from mining Trans-Pacific free trade pact fodder.

Brazil’s Erroneous Era Earmarks
2014 January 31 by admin

Posted in: Latin America/Caribbean
Brazilian shares continued at the BRIC bottom as the central bank again raised interest rates 50 basis points to 10. 5 percent on 6 percent inflation despite price controls, international accounts registered a decade-worse $12 billion outflow on a paltry $2 billion trade surplus, and slumping car sales dented chances for escaping flat GDP growth. The 10-year local Treasury bond yield in turn jumped to 13. 5 percent as the real headed toward 2. 4 to the dollar on pared swap intervention. On the fiscal side Finance Minister Mantega claimed a “record high” primary surplus around 2 percent of GDP with a series of one-time windfalls, including proceeds from the pre-salt oil field auction and provincial debt rescheduling. Pre-election spending will further reduce it to half the longstanding 3 percent result with President Rousseff favored by 45 percent of recent poll respondents for another term. To mobilize additional revenue the government has promoted infrastructure concessions to tepid response on regular rule shifts, as it scrambles to build all venues for the mid-year World Cup. Sovereign ratings downgrade and corporate default contagion scares have faded, as agencies are likely to postpone a decision past elections and the Batista OGX conglomerate completes asset sales and creditor negotiations which may bring new cash injection. A cabinet shakeup is set as members leave to contest seats, and a fresh chief of staff could foster minor economic policy changes with the flagship cash transfer anti-poverty program remaining sacrosanct. Mexico’s stock market start in contrast has been almost positive with auto exports and domestic purchases both strong as Mazda opened another plant. NAFTA retrospectives put wage and skill competitiveness now with China’s, as free-trade agreements extend to dozens of additional countries and the US-Canada connection is also embraced under the pending Trans-Pacific Partnership. Consumer confidence is still weak and the fiscal deficit is due to rise 1 percent of GDP in 2014, as the Pena Nieto administration works with the returning legislature on implementation of energy and tax reforms. Peso momentum has stalled with a break beneath 13 to the dollar as Japanese retail investors in particular rotate allocation, although foreigners continue to own half of long-term government bonds.

Chile and Colombia have fared even worse on an annual basis with near 30 percent equity declines mainly on commodity price softness. Chile’s short-term external debt to reserves coverage is thin due to private borrowing and President Bachelet’s return to office will initially stress her campaign platform of environment and education protection. Copper giant Codelco will likely see a management and governance overhaul advocated by private pension funds. Colombia’s current account hole should repeat at 3. 5 percent of GDP readily offset by foreign direct and portfolio inflows, as individuals and firms increasingly put capital abroad. New York-listed Bancolombia recently extended its Central American footprint with a Panama acquisition from its headquarters in Medellin addicted to cross-border creases.

Sovereign Debt Restructuring’s Reamed Remedies
2014 January 27 by admin

Posted in: General Emerging Markets
As the IMF continues outside consultations before presenting formal sovereign debt workout proposals based on last year’s staff options paper citing lessons from Greece and Argentina, private sector lobby groups which sank the original SDRM template have again responded critically and pre-emptively to assumptions and ambitions in a series of events and papers. In the alphabet soup of main industry associations EMTA held panels in New York, London and Washington, as a 50-member IIF task force issued comments and the Eurobond specialists ICMA drafted new majority voting guidelines. The Fund’s April report asserted that recent restructurings were “too little and late” and that the contractual market-driven approach was less effective for collective action. It cited risks from official lending used to bail out commercial creditors, and urged that at least maturity extension be considered as a precondition when a country loses market access, although immediate haircuts could be applicable in cases of outright insolvency. In pre-default instances the sovereign would be able to unilaterally table terms, while the policy for lending into arrears could still be honored in the absence of a creditor committee. Accompanying covenant changes would unify aggregation clauses across bond issues to thwart blocking minorities, even though holdout and litigation resort has been rare according to a Moody’s survey of exchanges since the late 1990s. Such steps would undermine cooperation and confidence and be too “demanding and rigid” in the IIF’s view. They could affect the credibility of Fund debt sustainability analysis, and repeat the previous unviable effort to require advance “private sector involvement. ” Good faith dialogue with a representative debt holder group is “instrumental” and investor diversity is not an obstacle, it argues. The crisis resolution experts from the banking and securities communities welcome revisions to aggregation and pari passu provisions which have complicated outcomes, but warn against sweeping language raising equal treatment and enforcement issues. A decade-old code of conduct remains in place to bolster contractual arrangements although both could be “enhanced,” they add.

While attention is on Europe and Latin America-Caribbean experience, low-income economies in Africa and elsewhere are likewise under Fund scrutiny with the spike in post-HIPC commercial borrowing rendering 5-year old indicative limits obsolete. Since 2009 concessional facilities have been defined as a minimum 35 percent grant component, with bilateral and multilateral providers allowing market-based debt on a case-by-case basis. The cutoff may be arbitrary according to a December review, and instead only “macro-significant” loans at 1-2 percent of GDP, which may not be tied to specific projects, should be covered in program and surveillance activity. In countries with weak capacity and at high risk of distress additional safeguards may apply, including detailed annual reporting on obligations and purposes. They would be quantified in nominal or present value form and the approval process and management strategy should be designed to strengthen poor country “bargaining power” as the scales tip to global private sourcing, the paper advises.

Sudan’s Unceasing Secession Tendencies
2014 January 27 by admin

Posted in: Africa
Months after reaching agreement with Khartoum on detailed implementation of its 2-year old independence, oil producing South Sudan, which provided two-thirds of hard currency earnings and half of budget revenue, splintered again into tribal and leadership conflict between loyalists to the president and vice president as neighbors tried to mediate and the UN mission added thousands of troops. China, the biggest petroleum importer, pledged to work with Europe, the US and Gulf states toward a solution as the al-Bashir regime still under international indictment for war crimes marked 25 years in power with the economy in tatters and relief elusive on the $45 billon external debt mostly in arrears. It aims to restart a staff-monitored program with the IMF, which estimates 2 percent GDP growth in 2013 on 30 percent inflation and a chronic fiscal gap reflecting staple subsidies and meager tax collection. Its latest Article IV consultation criticized a 20 percent public salary hike and fuel transfers “disproportionately benefiting the rich” as the flagship state telephone company banned the internet and went bust. The security apparatus already takes around 70 percent of the budget to fight dissidents and rebel groups, and military elements in the government advocate greater spending. Arab Spring-like street unrest against higher living costs met with harsh response and peaceful opposition interests have been quashed. External credit lines to import food are scarce and domestic Islamic bond issuance to banks to cover borrowing has experienced repayment delays and defaults. The multi-tier exchange rate arrangement is in temporary violation of Fund provisions with the South’s breakaway, with only a fraction of remittances routed through formal channels. The currency is overvalued and foreign reserves are inadequate, as it recommends immediate flexibility and unification which authorities challenge. Islamic banks represent over 95 percent of the financial sector, with the rest insurance and micro-lending. Capital adequacy is under the 12 percent standard, with private credit just 12 percent of GDP. The Khartoum Stock Exchange operates under old legal and regulatory structures and equity trading is scant. High-yield government musharaka certificates tend to displace alternatives, and 15 micro-finance units must rely on wholesale funding.

Secondary debt prices have corrected after a post-independence rally posing the chance for sanctions removal and arrears clearance. An initial deadline for reaching the HIPC decision point was set for later this year which could trigger official forgiveness but will likely be extended. Non-concessional borrowing from Chinese and other providers has typically been project-tied and came to almost $300 million in the first half of 2013. Beijing’s infrastructure footprint on the continent was recently supplemented by a Japanese aid thrust during a swing to selected capitals by Prime Minister Abe. Amid the fallout in Juba, Kenyan officials plan to go ahead with a maiden sovereign bond at the same time they host negotiations between the battling parties and deal with Horn of Africa security blows.

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Poland’s Stalwart Pension Pandering
2014 January 21 by admin

Posted in: Europe
Polish stocks were unchanged in 2013 as the $50 billion government bonds half of private pension assets were transferred to the state social security fund although the enabling law will be reviewed by the constitutional court. The switch was condemned by its post-communist sponsor former Finance Minister Balcerowicz, who runs a free-market think tank, as “expropriation” although ratings agencies and the IMF in its January extension of the flexible credit line hail resulting fiscal improvement. The opposition party currently ahead in opinion surveys hailed the move against “foreign-owned oligarchs” as half the population was ambivalent about reforms which will slash official debt 10 percent from the current 55 percent of GDP statutory ceiling. The pools have appealed to Brussels citing EU rules against property confiscation and exchange privatization offerings have been revised pending institutional allocation and central bank monetary policy clarity. Interest rates are on hold with inflation on target and economic recovery after a “cyclical slowdown,” in the Fund’s view. Unemployment is almost single-digits and the trade surplus was “unprecedented” with Eurozone stabilization, but capital outflows pared overseas ownership of local Treasuries to under 35 percent with 10-year yields up 100 basis points. Bank earnings and capital are solid with the tier 1 ratio at 15 percent of risk-adjusted assets, and bad loans at 8 percent of the total although small business impairment is twice that measure. Foreign currency mortgages are no longer offered under strict prudential rules and zloty liquidity is “ample” and aided both by the Fund facility and Swiss National Bank swap agreement. The 2014 fiscal deficit should drop to 3. 5 percent of GDP on better tax collection and “sound management” should allow early external financing. Credit unions are now subject to single regulatory oversight and the resolution regime will be modernized to conform to the evolving pan-European vision. Under pension changes the foreign securities indicative cap will go from 5 percent to 30 percent of portfolios in 2016, but the consolidated defined contribution system will still be vulnerable to shrinking worker replacement rates. The criteria apply for keeping the Fund’s backstop in place until next year, when authorities plan to exit should outside conditions warrant.

The endorsement was in juxtaposition with Hungary, where program talks were indefinitely shelved as central bank head Matolcsy was unperturbed that half of foreign banks could pull out under the burden of heavy taxes and forint conversion mortgage relief. Heading into elections, the state’s 49 percent stake in Raiffeisen’s local unit may soon be increased to a majority as Fitch Ratings predicted “complete Austrian withdrawal. ” To help with funding the 35 percent share in the savings network Takerekbank will go on the block with other officially-controlled lenders FHB and OTP set to bid. Italian groups also contemplated escape as they continue to rely on ECB operations and are due to receive balance sheet inflexible criticism in its annual exercise.

Syria’s Searing Secondhand Stigma
2014 January 21 by admin

Posted in: MENA
Syria initially accounted for its chemical weapons stockpile to UN inspectors around the agreed deadline and an international conference was convened to explore rebel political accord with the Assad regime as the civil war continued to savage the remaining population and immediate neighbors. In Iraq fighters joined with internal Al Qaeda remnants to take cities like Fallujah, where the US suffered major troop casualties and losses before departure. The setback dented nascent interest in the Baghdad stock exchange and plans for an inaugural sovereign bond and permanent local custodian capacity to service investors. Equities in Jordan and Lebanon hosting refugees and sectarian rivalry continued weak after near 10 percent MSCI frontier drops in 2013, as the former went to the IMF and GCC for fiscal and balance of payments rescues and the latter was downgraded to B-minus with a negative outlook by S&P on “deteriorating fundamentals. ” Amman tapped the Eurobond market with a bilateral guarantee from Washington and the Fund waived state electricity company support targets to enable release of $1 billion. Economic growth is under 3 percent on massive budget and current account deficits and public debt/GDP at 80 percent. Lebanon’s price for the Syrian conflict has been $7. 5 billion according to a recent World Bank report, with $1 billion for the refugee influx. Growth is only 1. 5 percent on 5 percent inflation and double-digit fiscal gap. Although bank deposits at triple output continue to increase with diaspora flows, public debt is at Greece’s world beating level toward 150 percent of GDP and shunned by non-Lebanese holders also afraid of the leadership standoff between Hezbollah and opposing factions as they try to agree on a new president. In the region Libya’s implosion weighs in parallel on oil markets after the prime minister was kidnapped by militias and a prominent industry official was killed. Fields were shut down half of last year causing 5 percent economic contraction, the IMF calculates. The shaky government acknowledged “liquidity difficulties” may force resort to the sovereign wealth fund with an estimated $120 billion in assets to cover costs, but managers are still trying to trace transactions from the Qaddafi era. On the 20th anniversary of the Lockerbie airline bombing, international commercial sanctions remain in effect and the banking system may be Islamic-based under outline legislation part of the controversy over future direction.

Frontier Asia is embroiled in its own Islamic disputes as Bangladesh Prime Minister Hasina tries to further marginalize political opposition from that wing and the main opposition party following boycotted elections where half the seats were uncontested and international partners refused to send observers. The stock market was flat in 2013 on 5 percent GDP growth as the garments sector suffered dual blows from factory collapses and strike-related disruptions. Real estate sales were off 50 percent and the clothing export mess further tore at the worn banking system fabric.

Frontier Funds’ Flagrant Role Reversal
2014 January 17 by admin

Posted in: Fund Flows
EPFR’s 2013 detailed fund breakdown showed $4 billion in record frontier market inflows offsetting equal BRICs’ pullback, as all regional groups otherwise contributed to the almost $30 billion in equity outflows with only global versions positive for the year. Brazil, Russia and China withdrawals set new marks, with Korea a country exception attracting $2. 5 billion. The CIVETS (Colombia, Indonesia, Vietnam, Egypt, Thailand and South Africa) received $600 million despite two members in the “fragile five” high current account deficit column and perennial political unrest in Bangkok and Cairo. Emerging Europe funds were down $3. 5 billion despite Eurozone recovery sending $55 billion to core and peripheral Western destinations. All developed market vehicles took in $375 billion, around half to the US and $45 billion to Japan. By sector commodities experienced the greatest exit at $45 billion after topping the inflow list four consecutive years, and utilities also were shunned. EM bond and in particular hard currency flight were records with local currency’s $3. 5 billion leakage one-tenth the category total. Brazil bonds especially sold off, as the fixed-income aggregate shrank almost $75 billion concentrated in the US and Asia-Pacific with post-quantitative easing asset class rotation finally underway with the Fed’s modest $10 billion initial buying reduction. Frontier indices also led the performance sweepstakes with the MSCI ahead over 20 percent and JP Morgan’s NEXGEM 5 percent at odds with core universe declines. Argentina and Pakistan were standouts on both lists, and Ukraine was a distinct loser. Sub-Sahara African share rallies had Kenya, Ghana, Nigeria and Zimbabwe up 25-50 percent, while Cote D’Ivoire’s 7. 5 percent uptick paced the debt pack as Nigeria’s total return there was negative as investors pared overweight positions in advance of central bank head and presidential succession cycles. Jamaica’s NEXGEM 7. 5 percent gain likewise contrasted with a 30 percent MSCI drop, the steepest on the roster, as it struggled to meet IMF program targets with flat growth and tourism outlooks.

Among the CIVETS Thailand has replaced Indonesia in headline Asia concern following a 15 percent stock market setback last year, as the opposition party plans to boycott the fresh February vote called by Prime Minister Yingluck and street protestors demand her resignation in favor of a “people’s government. ” The military has thus far stayed removed from the impasse but another actor, the anti-corruption commission has entered the fray with charges against hundreds of lawmakers for supporting original amnesty provisions. Tourism has been relatively unaffected this episode but domestic consumption has slumped. Tech exports continue to bolster the trade surplus, which could benefit from further currency softness. However household debt at 80 percent of GDP, fuel price increases and infrastructure project postponement will indefinitely weigh on demand. Company Indochina diversification has also encountered complications with Myanmar proceeding slowly on investment approval and reform, and textile worker grievances in Cambodia met with harsh army response frightening frontier progress.

Tunisia’s Raw Revolutionary Sentiments
2014 January 17 by admin

Posted in: MENA
Tunisian stocks on the third Arab Spring anniversary ended with a 10 percent MSCI index loss, with heavyweight bank listings particularly battered as the Islamic party-led government disbanded ahead of long-promised full elections in the face of public sector strikes and security scares. The $1. 5 billion IMF program, off track for missed subsidy and tax targets, calls for recapitalization and restructuring of the state-owned units with 30 percent of assets literally looted by the previous regime, with Moody’s calculating recovery costs at 5 percent of GDP. A recent 50 basis point rate hike further squeezed liquidity in peril from steady deposit exit, as central bank reserves bolstered by lines from Qatar only cover three months’ imports. The 2013 current account deficit was 8 percent of GDP on weak tourism, light manufacturing and phosphate performance despite the currency’s 10 percent drop against the euro. Economic growth is under 3 percent on inflation double that level and the 2014 budget gap goal of 5 percent of GDP is remote with spending needed to tackle official 15 percent unemployment. A January bid to hike car taxes met with violent protest, and less-developed desert provinces argue that their plight remains ignored by Tunis. The powerful labor union federation continues to agitate for benefit and income increases as it attempts to guide future political direction. The combined pressures spurred additional sovereign ratings agency downgrades from former prime quality, as both the Fund and African Development Bank delayed assistance pending greater policy clarity and discipline. Arab direct and portfolio investors are prodding Gulf countries to offer generous aid as in Egypt, where the stock market and ratings have rallied on initial post-Morsi pledges that restored the end-year reserve position to $17 billion despite $1. 5 billion in capital outflows and continued energy import arrears.
The pound was off 10 percent against the dollar but has firmed at 7 as the $100,000 at a time limit on cross-border transfers was relaxed. The new constitution referendum is set for late January to be followed by parliamentary and presidential elections as the Muslim Brotherhood’s top members and the ousted President enter military-guided court trials.

The interim administration unveiled two stimulus packages totaling $8. 5 billion to boost anemic 2 percent GDP growth despite the double-digit fiscal deficit and public debt near 90 percent of output. Inflation is at a 4-year peak approaching 15 percent as the central bank pauses following a series of rate cuts. The shrinking stock market may still be demoted to the frontier ranks by MSCI even though a recent Reuters survey of dedicated regional fund managers showed half intended to raise exposure. Morocco has already been relegated to that status and the Casablanca exchange was down 7 percent in 2013, but $6 billion in IMF precautionary support and Eurobond access along with a multi-party ruling coalition have thus far positively channeled revolutionary fervor.

Pakistan’s Prickly Purge Portents
2014 January 14 by admin

Posted in: Asia
Pakistani stocks closed 2013 with a 30 percent MSCI climb under an IMF program restart and scheduled Eurobond market return despite a range of economic and financial sector performance setbacks underscored in the Fund’s “mostly satisfactory” initial check. In particular the floor for net international reserves was breached as workers were expelled from Saudi Arabia and tensions mounted around former President Musharraf’s trial for alleged corruption and rights abuses. The central bank’s foreign asset position turned negative through September on over 5 percent rupee depreciation against the dollar with gross holdings at $4 billion covering just a month’s imports. GDP growth for this fiscal year will be under 3 percent on estimated 10 percent inflation and rough current account balance. Government borrowing for the budget deficit has led to a high 40 percent concentration of Treasury securities in bank portfolios which combined with bad loans may presage liquidity and profit squeezes, according to the December report. Public and external debt sustainability remains sensitive to shocks including criminal and sectarian violence and Afghanistan war spillover following the scheduled 2014 pullout of US troops. Revenue collection improved with income tax targeting and increased sales levies along with the settlement of state company obligations and electricity tariff adjustments. Audits are underway and exemptions have been eliminated in parallel with anti-money laundering efforts. Monetary policy will be tightened and the central bank is on track to limit foreign exchange derivative exposure as it attains independence in governance and operations. New insolvency, securities and deposit protection laws are planned, and official debt market deepening is a priority to diversify banks’ 75 percent share tilted toward 3-month bills. Diaspora, indexed, and Islamic instrument use will feature in attempts to lengthen maturities and construct a yield curve. Power supply has strengthened and payment arrears declined since the new administration took office in mid-2013, and privatization pioneered during the Sharif era two decades ago is again on the agenda. Energy and insurance companies will soon be divested through the stock exchange and dozens of “strategic” enterprises are to unveil restructuring details.

The Fund warns that it is owed an amount almost equal to “critically low” reserves with 2014 reimbursements set at $2. 5 billion. Structural reform has just started and debt and equity offerings may encounter minimal foreign appetite, it concludes. South Asian neighbor India in contrast has experienced a share-buying revival in recent months, although the MSCI index was off 5 percent for the year and domestic investors are skittish heading into the election season. Food-driven inflation again hit double digits, but central bank chief Rajan maintained interest rates while promising tougher bad loan rules and inviting global distressed debt funds to aid in cleanup. Fixed-income inflows resumed in December as JP Morgan local benchmark index entry is in the frame, although perennial tax disputes with international telecom and technology firms threaten to quash spirits.

Argentina’s Grating Grocery Sweepstakes
2014 January 14 by admin

Posted in: Latin America/Caribbean
Despite 2013 Latin America leading debt and equity returns at 30 percent and 60 percent respectively, Argentina under new Economy Minister Kicilof, an avowed socialist in a policy group founded by President Fernandez’s son, entered January with tighter capital outflow curbs for individual travel and a 200 food item year-long price freeze hitting major foreign-owned supermarket chains. The reinforced interventions belied initial post-election gestures to lure energy investment and settle outstanding disputes, as the US Supreme Court is due to consider appeals of adverse “vulture fund” debt repayment orders. The peso fell to a record low of 10 to the dollar, with a 60 percent parallel exchange premium, on privately estimated inflation near 30 percent mirroring labor unions’ early annual wage increase plea. The government will soon unveil CPI index overhaul in consultation with the IMF, which has again delayed statistical manipulation sanctions for several months pending the launch. World Bank and Inter-American Development Bank anti-poverty borrowing has continued in the face of US and European no votes, as Chinese buyers remain wary of available soybean supply under current weather, tax and production conditions. Currency depreciation aimed at aiding exporters is foreseen at a 40-50 percent pace this year, as the reserve position further erodes toward $25 billion only half in liquid access. The stifling summer will likely entail power cuts and deter tourism as planning officials after denying tariff hike have threatened to seize the main private distributors. Although bilateral relations have cooled since Chavez’s death, the business and consumer crackdown follows on the heels of Venezuelan President Maduro’s “new economic order” against the “parasitic bourgeoisie” as he attempts to consolidate political power and tackle 55 percent inflation on meager 1. 5 percent GDP growth. The exchange rate regime will be run by a single authority following 45 percent devaluation for non-essential goods to 11. 5 to the dollar, around one-sixth the unofficial rate. Domestic oil prices will stay heavily subsidized as state monopoly PDVSA returns to active local and foreign bond issuance under preliminary Finance Ministry guidance. Foreign reserves are held disproportionately in gold, and commercial transactions with dollar-based Ecuador have shifted to the virtual “sucre” instituted also with Bolivia and Nicaragua in 2010. Unlike the globally-known bitcoin the arrangement is overseen by central banks and Ecuadorean companies used $750 million equivalent through the third quarter of last year. According to executives, payment approval is faster than through formal channels although the route may be tapped regularly for money laundering.

Brazil on the other hand was at the bottom of the securities pack as it heads into its own election season and soccer World Cup with President Rousseff still the favorite, despite poor growth and trade figures and real slippage toward 2. 5 to the dollar despite extended interventions. The budget primary surplus was half the 3 percent of GDP target and sovereign ratings downgrade may soon be added to the spoiled recipe.

Latvia’s Splattered Euro Spin
2014 January 9 by admin

Posted in: Europe
Although less than half the population supported entry and the government fell apart just prior to the transition to atone for a tragic building collapse, Latvia officially became the euro’s 18th member in January capping a positive year for Baltic stock markets as Lithuania may be next in the single-currency queue. Remaining lats in the banking system were converted smoothly to EUR 8. 5 billion, but the switch was spoiled by heightened international scrutiny of alleged money laundering by 20 institutions handling mainly non-resident accounts which jumped over 15 percent in early 2013 as Russian and Ukrainian depositors fled Cyprus. The local regulator after a hands-off stance recently imposed a fine for control violations associated with Russia’s Magnitsky case, where former Yukos Oil company funds were funneled out of the country under murky circumstances never clarified with the holiday season pardon and release of jailed ex-CEO Khordokhovsky. Watchdog group Global Witness has also tracked a portion of $10 billion in offshore money to illegal actions in Cote d’Ivoire and Kyrgyzstan, and US authorities have penalized big multinational lenders for infractions, with JP Morgan just suspending Riga correspondent relationships. Officials have told the EU disclosure and tax practices could soon change while maintaining the center’s confidentiality reputation. They are spooked by the prospect of a Cyprus-like panic as almost half of deposits were lost since the crisis there broke a year ago. The surviving biggest bank recorded another loss in the latest quarter with a 50 percent NPL ratio. Spending was cut 10 percent in the new budget with debt/GDP at 125 percent and deep recession predicted indefinitely. Capital controls are still in place with tourism off 3 percent in 2013. Slovenia avoided a similar fate by organizing its own banking rescue through a central asset management agency that will absorb over EUR 3 billion in bad credit, as its 10-year benchmark bond yield dropped to 5. 5 percent on a successful private placement and parliamentary no-confidence motion defeat. The beer monopoly Lasko is on the block and privatization has sparked MSCI frontier interest as equities were up 20 percent last year.

A December IMF study and conference focused on the separate risks from Nordic-Baltic financial sector integration with pronounced oversight gaps from cross-border banking group and stock exchange consolidation. Memoranda of understanding exist but are untested in practice and safety net schemes like deposit insurance “differ widely,” according to the document. Insurance, pension, leasing and securities products are increasingly linked through complex conglomerates and regional banking systems are highly concentrated. Household and mortgage business has expanded rapidly through Baltic universal providers drawing on Scandinavian parent capacity led by Nordea and SEB with their sweeping networks. Nordic ownership of banks in Estonia, Latvia and Lithuania has promoted post-crisis confidence with liquidity and technology infusion but contagion potential as well should a Swedish lender freeze cause skids, the review cautions.

Dubai’s Exponential Revival Reverie
2014 January 9 by admin

Posted in: MENA
UAE shares up 90 percent further dominated the Gulf cohort as Dubai won the host competition for World Expo 2020 on some $50 billion in planned infrastructure outlays by end-decade as the event itself raises GDP an estimated 2 percent. Air terminal expansion is also in view as the Emirates flag carrier recently placed a $55 billion order for Boeing 777 jumbos financed with aid from the US Export-Import Bank. Property prices have rebounded almost 30 percent the past year despite new bank limits and fees, as defaulters from the post-2008 crash remain in jail demanding legal reforms for release. The medium-term debt headache includes $20 billion owed to Abu Dhabi and the central bank next year and $85 billion in maturities through 2017 according to the IMF, as state-owned lender Emirates NDB holds $25 billion in exposure. After acquiring BNP Paribas’ Egypt operations it will also emphasize Islamic and small enterprise credit there, as peers push deeper into Africa to service regional and Asian clients mainly from China. Dubai’s trade with the continent rose 25 percent to $30 billion in 2012, as the big four Chinese banks moved into the international financial center for cross-border reach. Export credit along the corridor increased 5 percent in the first half, as global emerging market specialists Barclays and Standard Chartered try to defend their franchises. Sub-Sahara boosters believe that the WTO’s administrative facilitation accord will benefit key countries in light of a comprehensive African Development Bank report citing dozens of filings and procedures for simple customs passage. Private equity investors are also scouring the area for basic financial services plays as evidenced by Abraaj’s buyout of Ghana Home Loan, which may eventually seek an Accra exchange listing.

Saudi Arabia’s capital markets regulator approved UAE cross-listings in November in another modest liberalization step helping to maintain the largest bourse’s annual 20 percent gain. Utilities like the Civil Aviation Authority with a $4 billion placement have accounted for three-quarters of GCC Islamic bonds in 2013, as tiny neighbor Oman facing a $2. 5 billion public wage jump contemplates initial recourse. Debt/GDP is low at just 5 percent, but a likely oil price drop to $90 per barrel could warrant additional revenue options through privatization sales and foreign worker taxes. Over $15 billion in assets are available through sovereign wealth funds, and the government could also slash food and fuel subsidies. Qatar’s gross debt at 35 percent of GDP is the group’s highest and it has introduced fresh borrowing controls with $200 billion in facilities due to be built for the 2022 soccer World Cup. The world’s leading natural gas producer has an investment-grade sovereign rating with the benchmark bond yielding 3. 5 percent, but credit has jumped at triple the pace of 6 percent economic growth. Bahrain has been the performance exception with an 8 percent loss on continued Shia backlash against the ruling family and corruption with the main aluminum company under trial both at home and in London.

The Caribbean’s Seasonal Jubilee Jumble
2014 January 6 by admin

Posted in: Latin America/Caribbean
Debt forgiveness pleas by religious and social activists, initially aimed at official and commercial lenders during Grenada’s second workout, turned more vocal during the holiday “jubilee” period as the relief spirit of the HIPC program a decade ago was recalled to slash the Caribbean’s average 70 percent public debt and 20 percent current account deficit to GDP levels. A half dozen states have restructured since 2010, and Barbados is now scrambling to avoid IMF resort after a $500 million 10-year failed bond sale on government debt/GDP at 95 percent with a currency peg and recession. Flat tourism and a “sharp” private capital inflow drop have left reserves below half a billion dollars, according to the Fund’s December Article IV report. The opposition party tabled a no-confidence motion against the Finance Minister, who is trying to cut civil service employment and wages under an improvised austerity program. The checkup criticized the lack of a “comprehensive, strategic approach” to ailing public accounts as it urged greater customs and tax compliance and oversight of state holdings. It recommended reversal of central bank buying of Treasury bills and stricter supervision of bank and insurance asset and collateral positions. A rescue precedent was set by Jamaica early in 2013 when it garnered $2 billion in bilateral and multilateral support after completing another domestic debt rescheduling. The latest installment of its $1 billion Extended Fund Facility was granted with budget execution “broadly on track” on Q3 economic growth of 1 percent and 10 percent inflation reflecting local dollar depreciation. International reserves are back to three months import cover, and a fiscal rule will soon take effect targeting a 60 percent public/debt GDP ratio in 2025, versus over 140 percent today. Securities dealers took portfolio losses from principal reduction and maturity extension and repo squeezes and revamping their regulatory framework is also a priority under the arrangement. Despite the progress ratings agencies have not upgraded the outlook from “high probability” additional default, and rampant crime and on-line scams continue to deter visitors.

In Haiti on the eve of the fourth earthquake anniversary the Fund estimated growth and inflation each around 4 percent the past fiscal year, but decried large electricity and other “costly” subsidies in the face of lower foreign assistance. They divert needed infrastructure spending and prevent the buildup of “buffers” for weather and related emergencies. President Martelly faces internal and external outcry over continued election delays and his desire to reconstitute the army disbanded two decades ago. UN security forces were found culpable in originating the cholera epidemic and the President cites national pride for the project while acknowledging the protective capacity of 10000 trained police. He claims no outside enemy, but is mired in a diplomatic spat with the Dominican Republic on the joint island over stripped citizen rights for thousands of Haitians long working and residing there. Regional association Caricom denounced the move as debt service naturalization also remained elusive.

Debt Funds’ Jumbled Jingle
2014 January 6 by admin

Posted in: General Emerging Markets
Retail-driven bond outflows continued into year-end at around $50 billion according to EPFR although the 2013 sum was $10 billion positive in contrast to equities on “sticky” institutional allocation still underweight traditional benchmarks. The total was just one-tenth 2012’s record and embraced local over hard currency in reverse preference, as individual investor flight the past six months outlasted the post-crisis 2008-09 period and reflected both Fed tapering and political headline risk aversion. Strategic mandates were steady at a $2-billion plus monthly pace, as US pension funds hold under 5 percent in emerging market fixed-income with an unchanged position since boom times, a recent IMF survey reveals. Foreign accounts are only one-quarter domestic institutions’ over $1 trillion in exposure, while North American, European and Japanese retail vehicles own $350 billion. More liquid sovereigns have suffered $40 billion in outflows since mid-year with corporates down less than $2 billion. ETFs which could have aggravated withdrawal are small at around 5 percent of the universe compared with the 25 percent concentration for stocks. The post-May exit coincided with strong primary market recovery as modest central bank Treasury buying pullback was delayed until December. Near $50 billion in official and $150 billion in company issuance was absorbed, with the latter setting another annual mark at $350 billion. The second half featured African placements from Gabon and Nigeria as regional activity topped $8 billion, with Kenya’s debut set for early 2014. On the EMBI the average yield was over 6 percent as the gauge plummeted by the same amount as a poor-performing asset class. In Q3 trading volume was off 20 percent to $1. 25 trillion according to industry monitor EMTA reflecting the temporary corporate pause in particular. Local instruments were two-thirds of volume at $825 billion led by the BRICS, while in Eurobonds the sovereign-business split was 60-40. Active international targets included Brazil, Venezuela, Russia, and Ukraine while India and Turkey ranked also in domestic frequency.

Ukraine teetered between Brussels and Moscow rescues until Russian President Putin won the bidding with a pledge to purchase $15 billion in government bonds and reduce gas import prices. Kiev demonstrators continued to clash with police as the first $3 billion installment was received and the central bank defended the exchange rate peg despite forward depreciation expectations. The stock market remained at the bottom of the MSCI frontier pack with flat GDP growth and farm and metal exports predicted for 2014. Nearby Turkey experienced another crisis bout as non-residents dumped the currency and securities as key ministers resigned in a project corruption probe which may mask a wider Islamic party power struggle between Prime Minister Erdogan and disciples of the Gulen movement. The central bank dipped into reserves again to support the lira at 2/dollar, as Erdogan’s camp decried an “attempted coup” after a previous military and judicial purge dashing EU aspirations recently hailed in spirit.



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Mongolia’s Invidious Anti-Invasion Force
2014 January 2 by admin

Posted in: Asia
Mongolian bonds followed sputtering stocks on late-year Samurai issuance guaranteed by Japan’s International Cooperation Agency which technically breaches the 40 percent of GDP public debt ceiling contained in fiscal responsibility legislation also routinely missed with deficit outcomes. GDP growth was again 12 percent in the first half on 50 percent breakneck credit expansion, one-quarter sourced from the central bank, prompting a Fitch Ratings outlook downgrade as it called for “stringent controls. ” Both FDI and the currency are off double digits this year amid stalemate over the $5 billion second phase of the strategic OT copper mine 51 percent owned by London-based Rio Tinto, whose fate was a central campaign issue in recent elections won by pragmatists vowing to “turn the corner” at an October investment conference. Over $6. 5 billion has gone into the open pit project which began production at mid-year as the government seeks new terms on funding and royalties as well as export and environmental policies. In other commodities a 15 percent coal price drop has eroded China shipments and delayed exchange listing of another mine, and the bilateral currency swap line was doubled in response. Fiscal and monetary stimulus and tugrik depreciation, currently the world’s fastest outside war zones, have revived 10 percent inflation hurting living standards, according to the Asian Development Bank’s annual review. Stubborn poverty and foreign investor backlash have combined to foster extremist political groups including Nazi sympathizers and “eco-terrorists” who have attacked international operators. Local anger has also erupted in fresh frontier market Myanmar, where office space in the capital is Asia’s most expensive at $100 a square meter, and family plots have been bulldozed to make way for offices and factories. The Thilawa zone on Yangon’s fringe has attracted Japanese interest but residents refuse to budge without major compensation and the military thus far has refrained from previous seizure practice. Dozens of multinational oil groups entered the auction for offshore blocks to be developed as joint ventures as existing relationships have frayed as illustrated by the headline clash between Singapore’s Fraser and Neave and its army counterpart over the biggest brewery. Agreements now allow international arbitration but in the past legal recourse was not an option with the junta responsible for enforcing provisions.

Communal and religious violence is another deterrent and invited widespread external condemnation following Buddhist moves against Muslims and discrimination against citizens from smaller states that led periodic insurgencies. The Rohingya minority in Rakhine province originated mostly from Bangladesh, which has been mired in its own civil strife with the two main political parties at loggerheads and trading strike action going into elections. Stocks are flat on the MSCI Index with limited economic shifts expected as textile exports remain under pressure from new labor and minimum wage standards. An Islamic party figure was hanged in December for his historic role in fomenting clashes which repeat throughout the sub-region.

Africa’s Rough Banked Diamonds
2014 January 2 by admin

Posted in: Africa
Ex-Barclays CEO Diamond touted an African return in his post-scandal reinvention through a private equity joint venture with a continental family-owned group. Initial targets could include cross-border franchises like Ecobank and larger markets like Nigeria and South Africa, where Barclays-Absa previously expanded with $100 billion in assets. International commercial and investment banks have also followed clients into a half-dozen countries where FDI and sovereign bonds are a focus as three-quarters of the population is “unbanked” and only 5 percent have a credit card according to industry consultant McKinsey. Returns on equity over 20 percent are double developed economies, and related financial services like insurance and pensions are often nascent. However recent moves into lower-end and consumer lending may have been overdone, with South Africa’s central bank calling annual 30 percent unsecured growth “unsustainable” as it passed one-tenth of outstanding credit. The pace has halved since mid-year as institutions took large retail losses and a specialist house saw its shares plunge on the Johannesburg exchange. Regulators have tried to moderate consumer debt which has been a mainstay of domestic demand while reiterating that it does not pose systemic risk to the well-capitalized system. Mobile operations have been launched to attract poorer individuals and households as in pioneer Kenya, but have not been as successful and mainstream competitors have reduced commitments under the weight of a 5 percent NPL burden in the first half. Electronic banking in contrast has taken off in Nigeria through all-purpose remote cards and Visa and Mastercard are boosting their franchises with new technology and anti-fraud features. In global insurance the Sub-Sahara represent less than 0. 5 percent of premiums even as the nonlife segment increased 7 percent annually the past decade, according to giant Swiss Re, mainly due to mandatory car and liability coverage. Life has been up at the same pace concentrated in energy producers like Angola and the UK’s Prudential intends to establish a regional presence through acquisitions after a Ghana deal.

African M&A at $40 billion through Q3 has risen 60 percent and along with natural resources consumer goods is a popular sector with Dubai’s Abraaj just buying Ghana’s Fan Milk, a big Accra bourse listing, with its extensive Anglophone and Francophone West Africa network. The Middle East connection extends to Islamic finance, with Nigeria and Senegal offering external sukuks and states in the former also using the no-interest structure. The Islamic Development Bank provides shariah-compliant infrastructure funding and several central banks participate in the Malaysia-based International Islamic Liquidity Facility. Kenya has established the legal foundation as it joins the early 2014 inaugural sovereign bond queue after this year’s record issuance, the latest a sequel from Gabon after its rating was affirmed. Foreign investor diversification and yield hunger support capital flows as well as prospects for “disorderly” interest rate jumps, the World Bank concluded in polishing its regular economic outlook.

Asia’s Peak Housing Precipice
2013 December 27 by admin

Posted in: Asia
The IMF’s latest global house price reference showed Asian markets still leading the post-2008 surge, with credit-GDP ratios in many countries at multiples of the region’s financial crash 15 years ago. China and Hong Kong top the worry list, with three-quarters of mainland investors surveyed pointing to “unsustainability” after major cities reported a 20 percent annual jump through November despite minimum down payment restrictions and local government additional land supply. Non-bank and provincial lenders have joined the main state banks as funding sources with ICBC publicly warning of a non-performing asset spike across the array of property and associated categories. In Hong Kong values have doubled the past five years, with the residential component up 25 percent in 2012. By mid-decade experts predict a 30-50 percent correction similar to the post-Asia crisis, as stamp duty increases and tighter mortgage limits since 2010 have proved ineffective. Bank credit to GDP has almost tripled to 300 percent as real estate speculation is stoked by formal and informal cross-border channels evading Beijing’s cooling attempts. Rival offshore center Singapore ranks just behind in expense with a 40 percent climb since 2009 in the face of capital gains tax and specific borrower debt to income deterrents. The Monetary Authority just cautioned that higher global interest rates could send the portion of overleveraged households to 15 percent, with many also buying in nearby Malaysia, where prices in the capital have soared 60 percent over the period. Rater S&P recently downgraded the outlook on major banks due to the outsize consumer debt burden as the latest budget doubled the minimum non-resident purchase requirement. Home and credit card lines are also at 80 percent of GDP in Thailand, and the Yingluck government was just forced to call new elections as farm and auto credit incentives are under criticism for hiking public debt. In Indonesia and the Philippines personal lending has also spurted at a double-digit annual pace from a low base. In the former the central bank has raised interest rates heading into 2014 elections, and in the latter it imposed a 20 percent real estate exposure limit which is widely circumvented with remittance-based transactions.

In Korea with household debt nearing 300 percent of GDP authorities have focused on administrative measures and the new Administration’s first budget fulfilled a campaign pledge of temporary payment relief. In India bank and housing finance facilities are at one-tenth of output as the Finance Ministry prepares to recapitalize state-owned units and open the sector to greater domestic and foreign competition. With inflation again at 10 percent monetary policy will tighten and although opposition candidate Modi is the election favorite in early soundings his commercial and residential building approaches are unclear but would involve reduced bureaucracy. In developed Asia Australia was criticized both by the IMF and OECD for 20 percent overvaluation while media “bubble” citations have also burst the record set during the last decade’s mania.



China’s Giddy IPO Guidelines
2013 December 27 by admin

Posted in: Asia
Chinese stocks held their MSCI index momentum into the year-end economic work meeting, with GDP growth on track at 7. 5 percent on good industrial country export and retail sales figures, as the securities regulator detailed instructions for forthcoming Shanghai exchange IPOs after an extended moratorium. Over 750 companies have been waiting for approval which will remain tough to obtain but assign increased responsibility to underwriters and advisers for pricing and timing. Previously officials controlled the entire process and after-market performance lagged with the limited arranger stake. To avoid immediate losses, major share-holders will be subject to a 2-year lockup period and must buy back the offering if disclosures are unsatisfactory. The latter provision spooked investors on the high-growth Chi Next, where P/E ratios at 50 are five times the main board. Several dozen listings could be added in January diverting attention from Hong Kong where bank placements have been particularly active culminating in the Cinda bad asset management arm deal with 10 international cornerstone participants including US distressed debt firms. Capital inflows have boosted the local dollar to the upper intervention range three decades after the peg was launched, and renimbi deposits have also rebounded with reopening of the dim sum bond market and steady property prices despite prudential dampening. Smaller family run banks uncertain about their future are in alliance and merger talks with mainland partners, as the latter also tap wider outward liberalization channels. Domestic outlets have also opened with provincial banks allowed to unload bad loans nationwide, and negotiable CDs now authorized for the interbank market. Beijing’s audit agency has yet to release the formal tally of local government borrowing which may equal the $3. 5 trillion in foreign reserves, but the new leadership claims it is “under control” as further municipal bond pilots are planned in 2014.

Total social financing growth is under the recent 20 percent clip as authorities experiment with short-term rate and wealth management product squeezes and consider phased deposit insurance introduction. Corporate bond yields have also jumped on declining state enterprise profitability and rumors that selective defaults may finally occur with an estimate $450 billion coming due next year. Shipbuilder and textile producer collapses were forestalled with rescues during the leadership transition, and a solar firm was recently saved after external bond interruption. Big city property prices continue their ascent as the economic gathering mulls a comprehensive tax regime. Geopolitics may however overwhelm the debate as air patrols are positioned over disputed islands with Japan rerouting civilian traffic and drawing an admonition from the US to pursue peaceful diplomacy instead. Beijing has its own tiffs with Washington on currency and trade issues which have coalesced around the final push for a Trans-Pacific Accord with Asian neighbors said to represent the Obama Administration’s “pivot” strategy, as the Treasury Department pivoted from previous findings of large undervaluation in its regular report to Congress.

The BIS’ Statistical Blip Blasts
2013 December 19 by admin

Posted in: General Emerging Markets
The Bank for International Settlements’ Q2 data showed an unaccustomed slowdown in global credit flows to most emerging as well as developed market regions, in particular to larger and Latin American destinations. The 2 percent quarterly drop affected both banks and non-banks, as US dollar liabilities to Brazil and India doubled since 2009 and also jumped to Korea and Turkey. The BRICS’ fall was greatest in line with capital outflows associated with Federal Reserve moves, but Mexico Chile and other countries also contracted 4 percent for the worst performance to date. US bank claims in the area were almost $150 billion early in the year and their high concentration experienced abrupt reversal as the central bank signaled lower Treasury and mortgage security buying. By contrast Asia, Europe and the Middle East-Africa were “relatively stable” as commitments to China grew and Poland ones slipped, while interest remained in lesser-known locations like Angola, Morocco and Gabon. The organization pointed out that greater local office exposure often offset the cross-border cutback in major developing economies despite domestic currency depreciation against the greenback. Through end-September EM currency-denominated international bond issuance at $110 billion roughly equaled the corresponding 2012 period, mainly in the Mexican peso, Brazilian real and Chinese renimbi. One-third came from companies based in developing markets outside the unit’s home, including affiliates and offshore centers. With better credit ratings since 2010, the non-dollar and euro-share has averaged around 10 percent of the total, helping to reduce balance sheet mismatches. The euro has lost ground since the continent’s debt crisis as its EM portion including in Central and Eastern Europe is now below one-tenth.

A dozen countries reporting on OTC derivatives tallied the worldwide amount at almost $700 trillion through Q3 for a 10 percent rise since last January. Interest rate instruments were 80 percent of the sum, with the remainder foreign exchange-related, and the growth segments were swaps, forward rate agreements and options. Credit default swap volume was down $25 trillion through the half-year, although sovereign activity improved 10 percent. Gross market value was off 15 percent to $725 billion, a post-crisis low as centrally-cleared transactions were still less than 20 percent for multiple name contracts. The EM turnover leaders in local and international trading include the Turkish lira and Russian ruble and for thirty main jurisdictions the net-net count is over $1 trillion or 4 percent of GDP, with near 15 percent recent expansion outpacing advanced economies. Exchange rate products are over half of daily dealing, with equity and interest rate ones each around one-fifth, according to regular BIS survey. OTC markets take almost 60 percent of business and reflect increased foreign portfolio investor hedging and speculative demand. Asia, especially Hong Kong and Singapore are interest rate derivative hubs, and the region dominates FX as well, followed by Europe and Latin America with roughly equal 20 percent-plus contributions with the UK and US also hosting the craze.