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9 percent against the greenback. Both markets are at risk of further currency pressure due to heavy foreign holdings of local government bonds. Thailand, where the stock market lost a quarter of its value while the currency was down 8. 5 percent, is likely to outperform neighbors as a stimulus program, rural debt relief, and USD 50 billion multi-year infrastructure plan offset concern about falling trade, high household debt and the delay of constitutional reform and return of civilian rule.

In South Asia, the Indian economy expanded 7. 4 percent on an annual basis in the third quarter after growing 7. 0 percent three months earlier. The Paris-based OECD is projecting that India will have “one of the highest levels of growth” among emerging Asian economies this year, and projects economic expansion of 7. 3 percent boosted by consumption and investment. Inflation continues to tick up on food prices, which account for almost half of the CPI basket, after a poor monsoon season. Investors have welcomed liberalization under the Modi government but worry that key reforms, including tax rationalization and legislation on labor and land reform, will stall in parliament. The commodity price crash has resulted in a narrowing of the current account deficit which is expected to remain steady in 2016, as the currency holds up better than ASEAN neighbors – it fell only 4. 9 percent against the dollar in 2015 – while the stock market loss of just over 7 percent was the least in the core Asian emerging market universe. Nearby frontier stock markets Bangladesh, Pakistan and Sri Lanka turned in losses averaging 20 percent. In Pakistan continued IMF program observance is expected to result in economic expansion in the 4 percent range, although both the country and neighboring Sri Lanka are expected to see yields on their recently issued global bonds tick up on the global sell-off and strong dollar.

In Latin America, attention will continue to focus on the continent’s biggest market in 2016 as Brazil continues to grapple political and economic chaos as it prepares to host the Olympics. The currency, off more than 30 percent against the US dollar last year, is expected to drop by a similar amount in 2016 as bond yields rise following the sovereign downgrade to junk status by two ratings agencies with the economy expected to contract more than 3 percent. Funding the twin fiscal and current account deficits is increasingly expected to be challenging as the economy remains in deep recession while politics surrounding the impeachment of the president and the Car Wash corruption scandal are likely to deter needed fiscal and structural reform. In next door Argentina however, investors welcome the rapid return to free markets under President Macri who in his first full week in office lifted capital controls culminating in a large scale currency devaluation. While talks with hold-out creditors and high inflation following the lifting of capital controls will be areas of concern, the medium-term outlook for the economy is, particularly in terms of trade and investment, the brightest since before the sovereign’s 2001 default.

Exporters Chile, Colombia, and Peru – where stock markets sank 18 percent, 43 percent, 32 percent, respectively, while their currencies plummeted in line with commodity prices – are expected to continue to turn in soft growth and higher inflation. Peru’s presidential election in April is likely to go to a second round two months later, while stalled reforms in Chile are unlikely to be resolved. Overall economic performance in all three markets will remain dependent on commodity prices, which could force fiscal overhauls on rising deficits. The December election in Venezuela resulted in a short-term bond rally after President Maduro’s party took only a minority of seats but the prospect for a default continues to rise on low reserves and oil prices.

To the north, Mexico – where the peso and stock market fell 15 percent, the least of the major Latin American markets – inflation is at a record low and the currency’s depreciation has spurred manufacturing which is expected to continue to grow as the US recovery continues. Authorities hedged the price of oil and the IMF estimates the move saved the country USD 6. 4 billion last year as oil prices sank. Despite the global emerging market sell-off, international investors continued to buy peso bonds and foreign direct investment rose sharply. The 2016 outlook for Mexico is strong with the IMF predicting GDP growth of 2. 5 percent even with higher interest rates on strong domestic consumption.

In Central Europe, Hungary outperformed last year with the stock market turning in the only positive performance in the core MSCI emerging market universe, with a strong 33 percent advance. Interest rates are at a record low, the current account is in surplus and onerous levies on largely foreign institutions are due to be cut. Despite years of unease over government policies targeting foreigners, the government’s unpopular tax take on banks and other sectors has righted finances and the debt level is decreasing. A return to investment grade is likely this year as the government pushes ahead with bank privatization. In contrast, the Warsaw Stock Exchange lost more than a quarter of its value and the currency fell sharply against the euro while benchmark local 10 year bond yields rose, with the heaviest losses following the election of the Law and Justice Party. The new government vows to seize more control over the economy and concern over policy was heightened by the removal of executives at state-run enterprises and a new law which brought state media under government control. To the East, the Russian stock market ended flat as the ruble lost 20 percent against the dollar on falling commodity prices, international sanctions, and a deepening recession which will extend at least through this year as inflation remains in double digits. Ukraine’s stock market was down 42 percent last year and the currency has depreciated 65 percent since the former President fled the country, sending inflation over 40 percent. While parliament adopted a 2016 budget, there is worry that the IMF will not approve it and release the much-needed delayed tranche of funding this month, after having received nearly USD 10 billion from the IMF and other lenders last year.

To the south, Greece, recently returned to emerging market status, turned in the worst core market performance, with the market down 62 percent following elections, capital controls, and a third bailout. While banks have been recapitalized again, capital controls remain in place and fear is growing that the government will be unable to complete its first review with lenders under its bailout agreement and/or the government will be unable to pass needed legislation with only a slim parliamentary majority. In next door Turkey, where the lira lost a quarter of its value against the dollar and the stock market was off by one-third, concern over geo-political risks is rising as the country grapples with the fall-out of the war in Syria and the end of a truce with Kurdish militants. Despite the political void in the run-up to the second parliamentary election last year, the budget and current account deficits narrowed but investors and ratings agencies will continue to focus on the country’s vulnerability to external risks due to its high reliance on foreign capital.

Finally, in the Middle East and Africa commodity producers saw stock, bond and currency market routs. In the Gulf region, stock markets sank 15-20 percent as Saudi Arabia posted a budget deficit of 15 percent of GDP spurring investors speculate that the Kingdom will be forced to break the currency peg as oil prices remain low. To the west, the Egyptian stock market lost a quarter of its value while the pound fell 9 percent pushing inflation up to near 10 percent. Foreign reserves remain low and the shortage of hard currency is likely to worsen as tourists stay away after the downing of the Russian jet worsened security concerns. Commodity producer South Africa saw its share market plunge by more than one-quarter as the rand plummeted 35 percent in 2015. The sovereign is likely to lose its investment grade status this year as the twin current account and fiscal deficits widen. Finally, the continent’s biggest economy, Nigeria, also saw nearly a quarter of its stock market value disappear while the currency dropped 10 percent even with heavy central bank support which wiped more than 15 percent off of reserves despite moves to limit the availability of hard currency to importers mid-year. In the frontier African markets, the numerous nations that have come to market with Eurobonds in recent years will continue to see yields spike and currencies drop, as Zambia, for example, saw its currency fall 42 percent in 2015 and inflation soar to over 20 percent as the copper producer suffered from the commodity price drop.

In developed markets, a series of potential risks in Europe could threaten this year. Alongside the Greek government’s potential loss of its slim parliamentary majority over pension and other reforms, which would threaten the bailout program and return the world’s attention to the crisis, Portugal could lose its last investment grade rating, making its sovereign bonds ineligible for ECB purchases, and Spain may have a prolonged policy void if it goes to another round of elections. At the same time, the refugee crisis may change the political landscape in Germany, where the previous euro-skeptic, turned anti-refugee AfD party continues to gain support ahead of 2017 federal elections, while the right-wing National Front in France continues to draw support.

In the emerging market universe, the vulnerabilities will continue to weigh throughout the year, driven by the China slowdown which will impact not only on neighboring markets but also commodity and goods exporters across the globe, including Germany, Brazil, and South Africa. Ten days into 2016 data out of most emerging markets is dismal: China’s FX reserves were down USD 512. 66 bn in 2015 to USD 3. 33 trillion with December recording the biggest monthly decline on record, Brazil reported 2015 annual inflation of 10. 67 percent, the highest since 2002, Russian retail sales collapsed 13 percent in November, the biggest drop since 1999, etc. However, there are some brighter signs. India’s growth is expected to top 7 percent, the domestic-demand driven Philippine economy is among the most insulated in emerging Asia from China and is likely to grow more than 6 percent despite global turmoil and May elections, and Mexico’s recent reforms and a growing US economy are expected to continue to attract bond and foreign direct investors despite the low price of oil and equity sell-offs.

Another positive element this year is renewed emphasis on financial market development as part of bypassed post-2008 crisis structural reforms. In Europe, for example, Hungary and Turkey are overhauling stock exchanges, while cross-border integration such as the Andeans’ MILA should also further align regulation and trading. Official lender support could also be better positioned with the arrival of China’s Asian Infrastructure and the BRICS Bank, as the IMF after a 5-year delay got US Congressional approval for quota changes and permanent resource doubling to almost USD 1 trillion. These factors may help mitigate otherwise continued unfavorable GDP growth, earnings, commodities, fund flows, leverage, economic policy and geopolitical fundamentals, and individual asset classes could see modest gains. Equities could improve in a range from flat performance to low-single digit MSCI losses due to low valuations after three years of reversal; the EMBI sovereign reading should remain up on minimal activity while hard currency corporate debt finally corrects on a default wave; and local currency bonds could rebound selectively with less severe dollar appreciation. However 2016 results will still be mixed as a uniform rally awaits medium-term changes to economic, political and financial system models to reinvigorate investor confidence and enthusiasm, with end-decade marking the possible start of another lasting boom period.

[1] All stock market data is in US dollars on the MSCI Index as of 31 December 2015



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Stock Markets’ 2015 Universal Ugly
2016 January 12 by admin

Posted in: General Emerging Markets
Both the MSCI core and frontier benchmark indices dropped over 15 percent in 2015, with Hungary in the former and Estonia, Lebanon and Jamaica in the latter the only positive performers. The heaviest losers, with respective 50 percent and 60 percent declines, were Kazakhstan and Greece after lengthy devaluation and EU rescue sagas. In the main Asia gauge the China composite rallied toward year-end but still was off 10 percent, while India and Korea fell single digits and Indonesia, Malaysia and Thailand dipped 20 percent despite December’s formal launch of the ASEAN free-trade zone to coincide with the proposed Trans-Pacific Partnership with the US. The Obama Administration has made congressional ratification a priority in its final months despite opposition from the leading presidential candidates in both parties and labor groups. Latin America’s bloodbath featured 45 percent slides in Brazil and Colombia, and Peru was also off 30 percent as it prepares for frontier demotion with only three big liquid stocks. In Europe the Czech Republic and Poland shed over 20 percent and Turkey, 35 percent as Russia was ahead until further oil price damage in December causing a 5 percent loss. Middle East components Egypt, the UAE and Qatar were down more than 20 percent along with the sole African representative, South Africa.

On the MSCI Frontier, Gulf and MENA constituents were similarly weak with the exceptions of Jordan with just a 4 percent reversal. Ukraine, Bulgaria and Serbia were 30-40 percent lighter, while Romania gave back only 1 percent. Sub-Sahara African markets mostly slipped 20-40 percent, and Kenya which had avoided previous corrections was not spared on spreading finance official corruption reports. Argentina as the Latin American member fell 1 percent in dollar terms as the new Macri government abolished currency controls and export taxes, and elsewhere in the Caribbean hydrocarbon-dependent Trinidad and Tobago decreased 5 percent. In Asia Pakistan, Sri Lanka and Bangladesh were down 20 percent on average and Vietnam, seen as a key TPP beneficiary with its low-cost labor, ended with a 5 percent setback.

JP Morgan’s external bond EMBI measure in contrast was up 2 percent in 2015 on split direction from the dozen top countries. Ukraine, Venezuela, Argentina and Russia surged double-digits while Brazil, Colombia, Peru and South Africa slumped. Indonesia was essentially flat and the Philippines jumped 3 percent ahead of new presidential elections where a leading contender was recently disqualified on foreign citizenship grounds. Mexico (-2 percent) was a disappointment despite stable foreign investor holdings overall concentrated on local bonds, with $200 billion in Q3 trading volume outstripping rival instruments, according to EMTA’s latest survey. Activity plummeted 20 percent on annual basis to $1. 1 trillion, with over 60 percent in domestic paper. Behind Mexico in the category were Brazil, China, India and South Africa. Eurobonds were almost even between corporate and sovereign, and Kazakhstan was a new entrant for the latter. Chinese trading was 10 percent of the total, and in a separate tally CDS, steady at $375 billion for the period, has also registered as hedge funds swap temporary calm for more dire credit distress and currency devaluation scenarios.

South Africa’s Ship Captain Capsize
2016 January 12 by admin

Posted in: Africa
South African bonds and stocks ended 2015 with MSCI and EMBI losses, with President Zuma’s serial Finance Minister reshuffle upsetting investors and key ANC party backers alike ahead of local elections and signaled sovereign junk rating assignment in the coming months. Previous incumbent Gordhan returned to the post with a fiscal prudence pledge “to stabilize the ship” after an unknown backbencher was temporarily tapped as Nene’s replacement to a business and political firestorm after his sacking for refusing state-owned airline and nuclear station spending. Another well-respected former Finance Minister, Trevor Manual, claimed the episode had “completely broken” cabinet trust as the Treasury had been largely immune from scandal and presidential interference to sustain foreign bond inflows to cover the 4. 5 percent of GDP current account gap. In the immediate aftermath of the firing local bond yields jumped 100 basis points and the rand slid to 16/dollar. Economic growth is only 1 percent and public debt is in the 50 percent of GDP range counting contingent liabilities like power company rescue. Chronic electricity shortages are another blow to the mining sector suffering from commodity price collapse, as leader Anglo-American announced tens of thousands of worker layoffs with official unemployment already at 25 percent. The ruling party continued to support the President, whose term lasts through 2017, although corruption probes linger over state fund use for home renovations. He seized the diplomat’s role at the annual China-Africa summit in Johannesburg where Beijing promised another $60 billion in projects and bilateral free trade pacts.

Zimbabwe’s President Mugabe was a headline speaker and promoted the renimbi as a currency alternative after $40 million in Chinese debt was cancelled. Growth there is also just 1 percent, and a recent IMF visit affirmed that arrears and indigenization law clearance are prerequisites to re-engagement. The MSCI frontier component was off 40 percent in 2015 as successor jockeying seems to favor security hard liners with scant economic policy interest and knowledge to engineer a turnaround. The opposition Movement for Democratic Change has split into factions, and technocrats are increasingly prominent but have been unable to rally youth discontent. Botswana shares have declined single digits with diamond industry retrenchment, with the joint venture with De Beers trimming one thousand jobs as diversification calls intensify. A World Bank report noted that the gem was 80 percent of exports and a “shallow” private sector, as competitor India takes more of the cutting and polishing demand.

Kenyan securities likewise reeled on alleged missing proceeds from the recent Eurobond and elated graft charges resulting in official dismissals. The new central bank head, a member of the Opus Dei sect donating his salary to charity, has tightened monetary policy to quell inflation and protect the shilling and moved to consolidate the sector after 150 percent expansion the past five years. Smaller banks have been closed and subject to tougher enforcement as the dozen foreign ones rethink their presence and strategy. Barclays, with a far-reaching century-old continental network and $65 billion balance sheet, may shed assets under incoming chief executive Staley with lagging returns and personnel struggles at its main South African subsidiary due to shake up the colonial era vessel.

Brazil’s Unimpeachable Whirlwind Witness
2016 January 4 by admin

Posted in: Latin America/Caribbean
Brazil stocks and bonds were at the bottom of the MSCI and EMBI indices, with respective 40 percent and 15 percent losses into December, as street crowds joined beleaguered coalition party politicians in pressing initial impeachment stages against President Rousseff for budget accounting violations found by the government’s audit agency. She has not been directly implicated in the Petrobras Car Wash probe, with over 100 arrests tallied in the past two years including BTG Pactual investment bank founder Esteves, who resigned as chief executive as billions of dollars in assets were liquidated. The Supreme Court will rule on the removal procedure since the sole precedent two decades ago was for criminal bribery charges, and the appropriate timetable for possible vice presidential replacement with the next election due in 2018. The economy shrank 4. 5 percent and investment 15 percent in Q3, as inflation and the budget deficit hit 10 percent. Public debt is at 65 percent of GDP without a near-term primary surplus, and private sector borrowing stands at 95 percent, according to Fitch Ratings which joined S&P in sovereign investment grade elimination. Non-residents control one-fifth of local government debt, and one-quarter of issuance matures in the next year. International reserves over $350 billion cover $75 billion in external obligations, but portfolio outflows were $3. 5 billion in October and the current account deficit is stuck at 4 percent of output. Foreign direct investment has been flat and exports have picked up with currency depreciation toward 4/dollar but remain just 10 percent of the economy. Moody’s joined S&P in signaling imminent junk demotion on fiscal and governance “trend deterioration” and risk of outright “policy paralysis. ”

Banks are now in line for downgrades, although the NPL level is just 3. 5 percent, as deposits dropped at a $1 billion monthly rate and share prices over 50 percent. State mortgage giant Caixa slowed lines and the development bank BNDES reduced long-term credit one-third. Financial and corporate external dollar debt doubled since 2008 to over $250 billion, with a dozen defaults this year. The average cost is now almost 10 percent and $30 billion comes due the next two years with a 10/1 downgrade/upgrade imbalance predicted. Moody’s slashed Petrobras again in its latest move as management offered a stake in the offshore Libra field to meet repayments and sustain capital outlays.

In contrast Venezuelan bonds extended a 40 percent surge with the opposition’s thrashing of the ruling socialist party in parliamentary elections to win a clear majority. It will work for the release of jailed leaders and dismantling of pervasive exchange and price controls to reverse hyperinflation and severe recession, although the exact damage is unknown without official statistics. President Maduro accepted the result but claimed foreign conspiracy was a major factor, and he could be the target of an eventual recall effort after no-confidence votes are mounted against top officials for security and economic lapses. The victorious coalition represents a spectrum of individual and institutional interests but on foreign policy they may demand revision of Cuban ties. Balance sheet and operation cleanup is also a priority for the state oil monopoly, whose foreign suppliers now require pre-payment ahead of possible debt swaps following the partial Bolivarian revolution trade-in.

Egypt’s Crashing Pound Headaches
2016 January 4 by admin

Posted in: MENA
Egypt stocks were 35 percent in the red on the MSCI Index going into December, as a dollar shortage, lackluster parliamentary election turnout and plane crash killing all Russian tourists aboard took their toll on the 4th anniversary of the anti-Mubarak uprising. Standard &Poor’s downgraded the sovereign outlook to stable despite successful poll completion as it predicted 4 percent growth and a 10 percent fiscal deficit this year and medium term external financing needs at 100 percent of current account revenue and reserves. Hundreds of candidates from Mubarak’s former ruling NDP party were successful in races, but the outcome will not change cabinet composition, aside from the scheduled central bank head replacement, or economic policy as heavy domestic borrowing at $3 billion/week has sent public debt above 90 percent of GDP. Import-export cover is under one-third and FDI even with the new Zohr gas field find will be unable to bridge the balance of payments gap without further outside help from Gulf allies or a possible IMF standby agreement.

Foreign reserves have dwindled toward $15 billion and the pound has dropped over 10 percent against the dollar in the official market where banks and companies are subject to a web of access and trading restrictions against persistent IMF calls for more flexibility. The parallel exchange has drifted to 8. 5/dollar as the central bank scrambles to inject hard currency to ease the crunch. It may also raise interest rates soon under the new governor, a longtime state bank executive, to counter double-digit inflation and the Fed’s inaugural hike. The fiscal stance must also harden after a first round of fuel subsidy removal, but VAT implementation has been delayed and security spending may increase after the alleged terrorist bombing of the Russian visitor airliner, which resulted in a Europe travel ban to the Sharm-el-Sheikh resort.

Saudi Arabia as a key backer has endured its own 10 percent MSCI loss and S&P one-notch downgrade, with global oil prices touching $30/barrel and creating a 10 percent of GDP fiscal deficit and international reserve drawdown to $650 billion. The stock market incremental foreign investor opening has been overshadowed by speculation over the future of the longstanding 3. 75/dollar peg, which also came under scrutiny during the 2008 crisis after Dubai’s default. Forward options calculate minor weakness and CDS spreads have also risen marginally under the dual currency and credit pressures. Officials cut spending $80 billion and are studying energy subsidy reform as in the UAE, and have resumed domestic bond issuance and contemplate an external sovereign placement in 2016. Geopolitics also factored in the rating change with the cost of the anti-Houthi rebel campaign in Yemen, and participation in the anti-Isis airstrike coalition against strongholds in Iraq and Syria. Religious and strategic adversary Iran will also receive further sanctions relief in the coming months if international atomic inspectors sign off on dismantling efforts.

Libya also has a large Islamic extremist presence threatening neighbors as a Rome conference just produced a tentative unity government accord among belligerent post-Gaddafi factions. Tunisia after several tourist site attacks resulting in 20 percent MSCI share drop will erect a border fence until a government can restore order there. It also got additional World Bank and African Development Bank loans for job creation and bank rehabilitation, as a new foreign investment law moves through parliament to welcome such inflows.

Africa’s Cratered Debt Landscape
2015 December 24 by admin

Posted in: Africa
The IMF and World Bank issued an inaugural report on African and other low-income economy debt vulnerability after official cancellation and commercial resort the past five years, and found an uneven “landscape” with lower distress risk but deteriorating fiscal and liquidity indicators. They urged “heightened vigilance” at the same time Fund programs have resumed in Ghana and Mozambique, with Zambia likely to be added after upcoming elections. Over 30 countries graduated from the HIPC initiative as of 2013, and since the 2008 crisis debt-GDP ratios have crept up 10 percent for capital and current spending and real interest rates have also increased after being negligible over most of the period. The composition has shifted with reduced exposure to Paris Club and multilateral creditors and more to non-Paris Club members and domestic and foreign bond markets. International investor ownership rose to one-third of local debt in Ghana and Senegal, and to more than 10 percent in Nigeria, Uganda and Zambia. The trend reflects financial deepening but risks crowding out private sector borrowing needs and non-resident participation may be volatile, according to the review. From 2007-14 external sovereign bonds and loans were $40 billion and driven by both global and regional economic and monetary policies. Commercial credit for specific projects with lengthy negotiations has given way to rapid unsecured bond placement with improved African country ratings, and raised fiscal flexibility but also currency risk. For a dozen Eurobond issuers, debt-service will absorb almost double the share of GDP in principal repayment years, highlighting rollover danger. As international capital markets change prudent debt management should diversify the investor base and smooth the maturity profile, and recent operations have spread amortizations rather than follow the “single bullet” last stage. China and other non-Paris Club lenders now account for the bulk of bilateral HIPC lines, which came to 3 percent of GDP in 2014, 40 percent on non-concessional terms with an average 2 percent interest rate, the study data show.

The Fund and Bank loosened commercial debt limits to accommodate both demand and supply but warn that contingent liabilities, such as through public-private infrastructure partnerships, are not reflected in reported figures. In the past five years $75 billion has gone into power and related projects, and underreporting is rampant particularly in the poorest borrowers with limited capacity. The World Bank’s regular institutional assessments have not seen management progress in the majority of countries, and they lack a medium-term strategy associated with normal emerging markets. Since the crisis tax and export revenue performance have helped, but one-quarter including Ghana are in medium-to-high debt stress. It was 80 percent of GDP in the mid-2000s pre-HIPC and has almost returned there according to the latest Fund arrangement calculations. Servicing will take 40 percent of revenue this year, according to Fitch Ratings, and the yield for October’s 15-year global bond was almost 11 percent even with a multilateral guarantee. Interest rates at home are over 25 percent, with GDP growth at 3 percent on slumping commodity exports and the currency off 15 percent against the dollar. The previous Eurobond went largely for civil servant salaries, and investors and the opposition party heading into elections vow that future uses will be productive as they try to resurface the terrain.

Brazil’s Unimpeachable Whirlwind Witness
2015 December 24 by admin

Posted in: Latin America/Caribbean
Brazil stocks and bonds were at the bottom of the MSCI and EMBI indices, with respective 40 percent and 15 percent losses into December, as street crowds joined beleaguered coalition party politicians in pressing initial impeachment stages against President Rousseff for budget accounting violations found by the government’s audit agency. She has not been directly implicated in the Petrobras Car Wash probe, with over 100 arrests tallied in the past two years including BTG Pactual investment bank founder Esteves, who resigned as chief executive as billions of dollars in assets were liquidated. The Supreme Court will rule on the removal procedure since the sole precedent two decades ago was for criminal bribery charges, and the appropriate timetable for possible vice presidential replacement with the next election due in 2018. The economy shrank 4. 5 percent and investment 15 percent in Q3, as inflation and the budget deficit hit 10 percent. Public debt is at 65 percent of GDP without a near-term primary surplus, and private sector borrowing stands at 95 percent, according to Fitch Ratings which joined S&P in sovereign investment grade elimination. Non-residents control one-fifth of local government debt, and one-quarter of issuance matures in the next year. International reserves over $350 billion cover $75 billion in external obligations, but portfolio outflows were $3. 5 billion in October and the current account deficit is stuck at 4 percent of output. Foreign direct investment has been flat and exports have picked up with currency depreciation toward 4/dollar but remain just 10 percent of the economy. Moody’s joined S&P in signaling imminent junk demotion on fiscal and governance “trend deterioration” and risk of outright “policy paralysis. ”

Banks are now in line for downgrades, although the NPL level is just 3. 5 percent, as deposits dropped at a $1 billion monthly rate and share prices over 50 percent. State mortgage giant Caixa slowed lines and the development bank BNDES reduced long-term credit one-third. Financial and corporate external dollar debt doubled since 2008 to over $250 billion, with a dozen defaults this year. The average cost is now almost 10 percent and $30 billion comes due the next two years with a 10/1 downgrade/upgrade imbalance predicted. Moody’s slashed Petrobras again in its latest move as management offered a stake in the offshore Libra field to meet repayments and sustain capital outlays.

In contrast Venezuelan bonds extended a 40 percent surge with the opposition’s thrashing of the ruling socialist party in parliamentary elections to win a clear majority. It will work for the release of jailed leaders and dismantling of pervasive exchange and price controls to reverse hyperinflation and severe recession, although the exact damage is unknown without official statistics. President Maduro accepted the result but claimed foreign conspiracy was a major factor, and he could be the target of an eventual recall effort after no-confidence votes are mounted against top officials for security and economic lapses. The victorious coalition represents a spectrum of individual and institutional interests but on foreign policy they may demand revision of Cuban ties. Balance sheet and operation cleanup is also a priority for the state oil monopoly, whose foreign suppliers now require pre-payment ahead of possible debt swaps following the partial Bolivarian revolution trade-in.

The BIS’ Callous Calming Effect
2015 December 14 by admin

Posted in: General Emerging Markets
The Bank for International Settlements’ latest quarterly review cited “uneasy calm” in advance of the US Federal Reserve’s first post-crisis rate increase, as cross-border lending dipped through the first half and emerging economies had only $1. 5 billion in net bond issuance in Q3, the lowest since the 2008-09 emergency. Advanced market credit was down $900 billion in Q2, exacerbated by dollar and euro currency weakness, while China claims rose just $40 billion but contracted on an annual basis. India and Indonesia lines also fell, as did Brazil and Mexico. Total Chinese exposure was off $100 billion to $1. 2 trillion as of end-June, with the short-term under one year portion at $750 billion. Emerging Europe activity slipped $3. 5 billion, and Mideast-Africa lending improved by double that amount. Net global bond flows decreased $50 billion in Q3, with the developing market pace through September at $140 billion “significantly slower” than last year due to commodity debt and growth concerns, according to the update. All major markets including Korea and Turkey were shuttered, with the latter’s financial firms posting the worst volume since the crisis.

A separate chapter examines overall non-bank dollar debt accumulation at almost $10 trillion, with one-third incurred by resident borrowers, and external bonds through affiliates not captured in the data.
Uses can vary from trade and FDI finance to asset hedging and speculation, and statistics are unavailable for off-balance sheet transactions such as forwards and show the company location but not nationality. The research finds that a dozen countries represent 70 percent of the total, with Chile and the Philippines in the table as smaller bases. Dollar bank loans exceed bonds in China, India, Russia and Turkey, with most from resident banks. In Q3 China mainland foreign currency borrowing shrank $70 billion, joining the Hong Kong and broader foreign retrenchment to mark an “inflection point. ” Systems in Indonesia and Russia are also heavily dollarized drawing on domestic deposits, while Turkey sources dollars from wholesale facilities abroad as well as at home. Bonds outstanding were $1. 1 trillion for the group as of id-year, and in the non-bank general category government issues were the majority only in the Philippines and Turkey. Brazil is just behind China in offshore corporate bonds at $110 billion, while Russian firms tend both to tap banking and fixed-income markets overseas. Korea imposed a “macro-prudential levy” on dollar-denominated credit in 2010, and Russia’s recent local shift has been due notably to post-Crimea takeover sanctions. Indian regulators have again eased caps on corporate cross-border bonds, and the section suggests that as dollar costs rise the window there and throughout the core universe could narrow with market and policy responses.

However on a related topic the BIS uncovered no justification for the argument of ratings agency bias against the developing world as it dissected trends and methodologies since the crisis, with industrial countries from Europe in particular absorbing the downgrade brunt. Split decisions with different agency marks are common among the major and less-known international providers, and volatility is higher in CDS spreads and proxies like the Institutional Investor sovereign rankings. Assessment goes beyond simple debt burden to encompass a range of performance and policy factors so that any presumed emerging market discrimination is overcome by affirmative action, the paper comments.

Pakistan’s Miffed Military Lull
2015 December 14 by admin

Posted in: Asia
Pakistan shares were down almost 20 percent on the MSCI frontier index into December, despite relative security calm from a new civilian-military accord empowering an anti-terror sweep in major cities and tribal lands, and continued IMF program observance on track to 4 percent GDP growth the latest fiscal year. The army chief Raheel Sharif, no relation to the prime minister, has been in charge of the crackdown following a Taliban school attack killing hundreds of children and orchestrated a slick media campaign hailing triumphs while denying interest in broader governing power. The Fund arrangement has rebuilt foreign reserves to three months imports and targeted wider tax collection in an effort to lift it to 15 percent of GDP, and enabled sovereign ratings upgrades to low junk status. In September another $500 million global bond was issued and subscribed at double the amount with 8. 25 percent yield, but the reception was not as enthusiastic as last year’s return. In external accounts textile exports have flagged on the firm rupee and Gulf remittances may slow. In the domestic economy inflation is under 2 percent and the central bank has refrained from direct budget deficit funding, but spending has picked up on transport infrastructure in anticipation of China’s pledged $45 billion medium-term project windfall. Prime Minister Sharif has unveiled new bus and train lines and renovated the air terminal in Islamabad to public praise helping to silence the party challenge from former cricket star Imran Khan, who also had to recover from serious injury after a stage fall. Next year food inflation may push the rate to 5 percent and the central bank may have to reverse cuts, with the benchmark now at 6 percent.

Sri Lanka’s MSCI gauge fell over 20 percent as a war crimes tribunal was convened after the former ruling Rajapaska clan was soundly dispatched in parliamentary elections, and a 10-year $1 billion sovereign bond was floated after a previous one six months ago at a higher yield on concern over the 7 percent of GDP budget gap and currency depreciation. Interest rates have remained on hold and a $400 million swap facility with India’s central bank was tapped as the exchange rate was floated with the level set to drop below 150/dollar into 2016. The post-election fiscal plan ramped up public investment, but dropped the foreign ownership ceiling on local Treasuries to 10 percent. Economic growth will exceed 5 percent this year but inflation will rise also to that mark on rampant consumer lending which has led to the imposition of macro-prudential limits. Agricultural export prices have softened and tourism may also sputter with fewer Chinese visitors, although the administration may have backtracked on its initial intent to revisit the entire bilateral commercial and diplomatic relationship.

Bangladesh too skidded 15 percent through November with the approach of municipal election after Islamist party figures from the post-independence era were hanged for alleged war crimes. Extremist violence has spread today, with assaults on well-known secular bloggers claimed by Isis sympathizers, as Prime Minister Sheikh Hasina’s Awami League continues to harass and arrest opposition party leaders. The BNP has tried to keep its family dominance as breakaway factions demand fresh alternatives, with the standoffs entrenching both political and economic animosity.

Kazakhstan’s Chilly Privatization Promotion
2015 December 7 by admin

Posted in: Asia, Europe
Kazakh shares stayed in the back of the MSCI frontier pack with a 45 percent drop despite President Nazarbaev’s whirlwind investor trip to London with a declared package of over 50 small and large company exchange privatizations in coming years. However the record of “people’s” IPOs since 2012 has been thin with only two flotations, and the current recession and post-devaluation 30 percent currency loss against the dollar will further hurt prospects. The state oil and gas company recently got a $5 billion injection from the sovereign wealth fund to service debt as usable foreign reserves may be only a fraction of the $90 billion reported. The budget has swung to deficit on stimulus spending, and energy operators are demanding lower taxes given global prices. Inflation spiked to 15 percent with the exchange rate float coinciding with a new central bank head in a bid for confidence ahead of a “winter chill,” in the President’s words. While in the UK he signed dozens of deals worth almost $10 billion, and presented a dizzying range of transport and technology infrastructure projects striving to avoid the dashed fate of previous special economic zones. An offshore financial center modeled on Dubai is also in the works where the local stock exchange may move using facilities to be built for the upcoming Expo 2020. While the EU is the main oil export market, China is the biggest commodity partner overall and continued weakness there could extend GDP contraction. The tenge has slipped below 300/dollar with occasional intervention and may have a further 10 percent to fall to also realign with the stronger ruble. The peg departure was a shock but obviated the direction taken by next-door Kyrgyzstan where foreign currency sales are now banned due to som pressure. The banking system, still suffering a hangover from the 2008-09 crisis, may experience additional trouble as interest rates were hiked to 15 percent and next year’s budget pares government direct small business lending. The sovereign rating may soon be relegated to junk by at least one agency, which could accelerate plans to develop Islamic sukuk bond alternatives.

Ukraine stocks were down around the same as MSCI laggards but bonds have soared an equal 40 percent on the successful restructuring under the IMF program, which removed credit rating default status. However the $3 billion owed to Russia from the ousted predecessor regime has not been resolved, although President Putin suggested stretching repayment as a compromise still for the full amount. His Finance Minister warned of court resort should December obligations not be met, which could violate the Fund’s lending into arrears policy absent a determination they are commercial not official or can be renegotiated under another rationale. Corporate restructurings have also reached impasse in cases like Metinvest and Ferrexpo, and despite a GDP growth return in the last quarter and EU free trade onset in January agriculture and metals are slumping globally. Bank late and bad loans are at 20 percent of the total and the currency is due to slip toward 30/dollar keeping inflation around 25 percent. Output collapse will near 10 percent this year, and ruling coalition setbacks in parliamentary elections have stalled fiscal reforms with another harsh winter looming.

Hungary’s Exaggerated Exchange Wizardry
2015 December 7 by admin

Posted in: Europe
Hungary’s stock market was the region’s runaway winner into the last month of the year up 30 percent on the MSCI Index, triple Russia’s gain as the core universe’s other positive performer. The equity march came despite a 5 percent stake sale in leading bank OTP at a discount as the exchange itself was repurchased from Austrian control at $45 million for 70 percent back to “return as national property,” according to the central bank. Budapest Bank had reverted from private hands earlier this year, and airline Wizz Air embarrassed officials around the same time when it chose to list in London instead of at home. Capitalization is under 20 percent of GDP, and private pension fund elimination in 2011 has thwarted activity for small companies in particular the government targets under its Growth Support lending scheme which is to expand another 5-10 percent in 2016. However economic expansion may be just over 2 percent then with reduced EU fund receipt and farm production, and German manufacturing spillover with the VW crisis and China export slump. The budget deficit should stay under the 3 percent EU sanctions threshold despite an agreed cut in the special bank tax. Interest rates could be lowered further as the euro undergoes another QE round and inflation settles around 2 percent.

Polish shares veered toward the opposite direction with a 25 percent MSCI loss after the populist Law and Justice Party won a majority in parliamentary elections on a platform to enact its own banking tax and raise social benefits while keeping within the 60 percent of GDP constitutional debt limit. On foreign policy its tough stance against Mideast refugees is in contrast with the position promoted by former Prime Minister Tusk in Brussels. An experienced bank executive was tapped as Finance Minister, and the new administration will have a chance to replace almost the entire monetary policy board as terms expire in the coming months. They will likely ease another 50 basis points with a slow exit from deflation, with domestic-demand led growth again set for 3 percent in 2016. Eurozone recovery could boost exports but the current account may slip to deficit on consumer and capital goods import appetite. Privatization of state enterprises will go on hold and they are to raise budget dividends, according to the party’s campaign plans. The Warsaw exchange will remain a strategic holding, and alliances with neighbors are unlikely as initiatives toward potential Belarus and Ukraine entrants may be scuttled.

The Czech Republic’s share decline was almost as bad at 20 percent despite superior 4. 5 percent GDP growth from private consumption unlikely to last into 2016. EU spending that came to euro 6. 5 billion through September will taper and inflation may pick up toward the 2 percent goal on wage inflation and less output slack. The 27 koruna exchange rate limit will stay in place for another year but the central bank has left 2017 exit open. Its balance sheet has increased to 35 percent of GDP on regular interventions, but exposure is under half the Swiss corresponding sum when its cap was abandoned with the magic formula no longer entrancing investors.

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Private Equity’s Public Market Pummel
2015 December 1 by admin

Posted in: General Emerging Markets
A new paper commissioned by the Dubai-based Abraaj Group and written by Harvard Business School professors cites long-term performance and diversification advantages of private over public equity in 25 “global growth” markets across all developing regions, and urges they be complementary allocations in a balanced institutional portfolio in contrast with consultants’ frequent either-or approach. In 2014 less than one-tenth of private capital inflow came through stock exchanges and the ratio to FDI is under 0. 2/1, the research comments. For the markets under review the allocation as a portion of GDP is just 40 percent on average, but their size still swamps private equity where the highest penetrations are 0. 2 percent. Recent World Bank figures show they were 30 percent of worldwide capitalization, half the economies’ corresponding share of output. They are illiquid and low-volume in comparison with developed markets, whose share turnover is double and typically dominated by a handful of big firms posing concentration risk. In Colombia, for example state oil giant Ecopetrol is one-quarter of exchange value, and the ten main listings are 80 percent of the total. Smaller firms are shut out and instead issue overseas, and venture capital-related IPOs are around 20 percent of global activity. Public debt markets too are typically closed with limited creditworthiness, and many industries like consumer goods and healthcare are excluded with banks the overwhelming weighting. According to corporate databases, the earnings in overlooked segments are often superior, and have contributed to triple PE over MSCI emerging market index 3-year returns at 12 percent and 4 percent, respectively. Over 10 years the Cambridge Associates’ reading for the former maintains a 3 percent lead. The paper points out that top-quartile managers exceed the benchmark and have staying power, and that results are uncorrelated with other asset classes while both public emerging and frontier market co-movement has increased. It concludes that the latter are “immature” and that to spot and cultivate good investments both tracks should be pursued, especially to find them outside traditional financial and capital-intensive areas.

Outside its Middle East-Africa base Abraaj named battered markets like Argentina and Ukraine in its growth universe, and celebrated macro-investor Soros just took PE stakes in real estate and telecoms ventures in the duo. Argentina’s stocks and bonds have rallied on the Macri presidential election victory despite the no-preference stance of third party candidate Massa, who broke from the ruling Peronistas and their standard-bearer Scioli. A televised debate did little to erode Macri’s post first round momentum, as a central bank police raid focused attention on the outgoing government’s strong-arm tactics and possible dismantling of capital controls, as officials there were investigated for questionable currency deals. Formal devaluation is widely expected as reserve conversion may be needed for a holdout settlement, and the trade surplus dwindles on flat agricultural exports. Ukraine sovereign bonds are up 40 percent after a successful restructuring restoring the “B-minus” rating and a positive GDP reading. Russia’s $3 billion deal in the twilight of Yakunovych’s rule was left out, and President Putin floated a payment delay compromise without the same creditor “haircut. ” The IMF must still determine if the relationship is official or commercial as it updates its lending-into-arrears policy to reconcile public and private interests.

Argentina’s Mooted Mainstream Macri-Fundamentals
2015 December 1 by admin

Posted in: Latin America/Caribbean
Argentina’s stocks and bonds extended double-digit rallies with opposition candidate Macri’s 51-49 percent win over President Fernandez’s chosen Peronist successor Scioli, as a tense Casa Rosada meeting on the transition hinted at the rough economic overhaul path ahead without his party’s legislative and governorship control. The incoming president’s team has already suggested a phased timetable for lifting exchange restrictions in contrast with the campaign’s immediate removal promise, and negotiation delays with holdout bond creditors as it untangles the past decade’s reserve position and payment record. In the near term agricultural export taxes may be suspended, Mercosur free trade relations restored with Brazil, and statistics reporting revised in line with IMF recommendations for more accurate growth, inflation and fiscal deficit figures. Currency devaluation is a precondition for exchange rate unification, but an outright float could decimate the central bank balance sheet as a new governor prepares to take charge amid allegations of illegal official dealing. It could also dent domestic consumption while barely supporting dollar-denominated commodity exports, with recession return likely on stubborn 20-percent plus inflation with the weaker peso pass-through. The budget gap will persist at 4 percent of GDP without further subsidy cuts on momentum from pre-election spending and the true public debt ratio remains unknown with hidden accounts but may exceed 50 percent. With these adjustments and more investor-friendly policies, the sovereign rating is due for an upgrade, which will facilitate external corporate access by state oil firm YPF and other names prior to sovereign re-entry.

In next-door Bolivia President Morales will hold a referendum soon on re-election after a decade in power, with hydrocarbon-driven growth sliding to 3. 5 percent and spawning unaccustomed fiscal and trade deficits. A $50 billion 5-year public investment program is designed to cushion the downturn, but is often tied to energy projects with scant private capital scope despite new commercial and arbitration laws to address the expropriation tendency. The gas pipeline to Brazil will wane without fresh finds by end-decade, and the central bank continues to lend to state enterprises as foreign reserves dipped below $15 billion. The currency has been stable at 6. 9 per dollar but may drift to 7. 5 particularly with depreciation of neighboring regional units. Although another sovereign bond is in the works, Chinese loans remain the preferred external route with another $7 billion pledge in October.

Ecuador’s President Correa announced he will not stand in the next 2017 contest, with the oil economy in recession and trying to plug a 3 percent of GDP budget hole. Next year’s plan predicts a $35/barrel price and spending retrenchment, with additional arrears accumulation to contractors, but excludes a $1 billion arbitration award to Occidental Petroleum. The 2015 external bond matures soon and the government intends another $1 billion issue, as investors are wary over the President’s unabated criticism of the dollar regime although he has backed away from electronic money as an alternative. Domestic banks have suffered deposit outflows in the same concern and may have to tap a $2. 5 billion liquidity fund. In Venezuela the opposition should triumph in December parliamentary polls despite President Maduro’s jailing of leaders. The economy is in near-depression and hyper-inflation despite the absence of official statistics, and state oil monopoly PDVSA is considering a bond swap for $10 billion owed in 2016-17 as all parties scramble for default position.

Anti-Money Laundering’s Poor Country Soak
2015 November 23 by admin

Posted in: General Emerging Markets
With Turkey’s G-20 summit due to review the financial regulatory agenda, including unchanged remittance costs despite the 5 percent medium-term goal and bank “de-risking” shunning low-income economies and relationships with money transfer networks, a Center for Global Development report suggests negative “unintended consequences” from anti-money laundering and terror funding rules. The IMF’s Financial Stability Board recently cited severed correspondent bank ties hurting trade credit and other lines may be due in part to compliance costs and heavy penalties associated with enforcement of the provisions through the 25-year old unrelated Financial Action Task Force, created at the height of the global drug wars and then strengthened in the post 9-11 era. Risk-based standards are harmonized in principle across developing and industrial countries, and violators are placed on “gray” or “black” lists depending on shortfalls. National authorities are supposed to coordinate information-sharing and supervision, but in practice lack of capacity and a proliferation of agencies involved can leave gaps or sow confusion, with the US alone counting some 40 government unit participants. International banks have fled the money transfer business to high-risk locations like Somalia in recent years, with the last US connection Merchants Bank of California stopping facilitation of $1. 5 billion in diaspora flows early this year. Relief groups and congressional representatives have petitioned the Treasury Department to relax regulations, and providers in Dubai and elsewhere have stepped in, but remittance size and expense has noticeably deteriorated there, according to the UN. Normal correspondent accounts have also been closed under new anti-secrecy interpretations that mandate “knowing your customer’s customer,” and not only firms, but non-profit organizations and vulnerable individuals cannot access needed cash and expertise, the report notes.

Basic data and research is lacking on the extent of the problem beyond indicative surveys as public and private sector bodies do not exchange details about applications and decisions. The FATF guidelines could be more simplified and transparent, and compliance could be easier with technological advances like biometric identification. The World Bank has just updated remittance work which shows costs largely flat although certain corridors have seen scarcity and spikes, and the International Chamber of Commerce last year pointed out that trade finance was under pressure, but not mainly due to global bank de-risking. The IIF’s latest emerging market sentiment survey underscored that this constraint was widespread, as the benchmark index dipped to a record low in the face of credit supply and demand setbacks. In China reported non-performing loans reached a high in the past quarter at over $600 billion in aggregate, as total social financing fell by half on a monthly basis.

The IMF in its G-20 summit preparation published an analysis of migration and refugee trends with a $435 billion developing world remittance total in 2014, over half of FDI and triple official aid. It cited a study of higher household contributions to education and health over average consumption, and increased financial intermediation in response often through dedicated diaspora channels. However the 8 percent average transaction charge remains steep and a 1 percent reduction could release $30 billion, greater than Africa’s annual bilateral donor budget. Expatriate savings could also be harnessed through special bonds for infrastructure and social projects, but the record has been mixed in Ethiopia, Nigeria and the Philippines where offshore money is unfamiliar with such recycling, the Fund comments.

Haiti’s Ineluctable Election Rumbles
2015 November 23 by admin

Posted in: Latin America/Caribbean
Haiti’s presidential elections went into a second round amid continued violent protests that also complicated parliamentary runoffs, as allegations mounted of widespread fraud and manipulation despite observers’ presence, especially since President Martelly’s chosen successor was in the lead. He has fought with political opponents and civil society activists throughout his tenure coinciding with the record earthquake and donor-funded recovery program, and was forced to name a prime minister from a rival party after several candidates were rejected. Before the political transition, the IMF agreed to a new $70 million extended credit facility, with the GDP growth forecast lowered to 1 percent after severe drought, and inflation headed to double-digits with the food price shock and exchange rate depreciation. The budget deficit objective of 2. 5 percent of GDP was in peril prior to the election cycle, with heavy state power company losses and declining aid from Venezuela’s Petrocaribe. The previous Fund line noted “disappointments” with structural and financial sector reform in particular, although it cited monetary policy progress. Per-capita income improvement since the 2010 temblor did not reduce poverty, and fiscal and current account gaps widened. External public debt below 9 percent of GDP with the earthquake writeoff had rebounded to 20 percent last year with Caracas’ concessional loans. The central bank has tried to limit currency devaluation to 3-4 percent annually, but the rate doubled in recent months with dollar hording over the poll period.

The World Bank’s “Doing Business” ranking is 177 out of 189 countries, and it is also at the bottom of competitiveness and corruption indices. Weak property rights and “predatory” commercial practices are binding constraints, according to the IMF’s recent Article IV report, and security, infrastructure, human capital and economic data foundations are lacking. Inflation is above trading partners, and the “crawling” peg currency regime may have to be revised with tapering assistance and remittance flows. Fuel taxes have not increased and VAT introduction is nascent with revenue/GDP below 15 percent, and a single Treasury account system is not yet in place. Bank effective reserve requirements over 30 percent are still hefty, and open market operations have just begun through bonds to include dollar-denominated issues. The foreign exchange market must be deepened, and banks are well-capitalized and profitable but credit in the absence of a functioning bureau is concentrated on aid-related customers as the rebuilding effort winds down. A Petrocaribe financing stop would cut 1 percent from output and authorities would have to draw on commercial bank deposits, further posing risk. The system must still also meet anti-money laundering and international accounting standards.

US investor curiosity has been diverted to Cuba with the mutual embassy opening and partial lifting of banking, travel and telecoms restrictions short of trade embargo elimination. Agricultural exporters believe they could quadruple sales with changes in the two-decade old Helms-Burton Act, and multinationals like Coca-Cola expropriated during the revolution have hinted at return. The Havana Trade Fair in November attracted North and South American, Asian and Russian interest and private equity firms such as London-based Redux have launched dedicated funds. However the closed-end Herzfeld Caribbean Basin offering is off 25 percent this year after early enthusiasm as island reconstruction difficulty there compounds.

Nigeria’s Copious Currency Complaints
2015 November 16 by admin

Posted in: Africa
Nigerian stocks sold off to extend a double-digit MSCI loss and the parallel naira market spiked as President Buhari tapped investment banker and currency control policy defender Adeosun as Finance Minister, while keeping the Oil Ministry portfolio himself. The appointment surprised investors after the central bank chief seemed to hint at more flexibility at a London conference, after imposing restrictions on another 40 import categories and ordering tax identification registry for all money dealer transactions. In the past year reserves have dropped one-quarter to help preserve the official 200/dollar rate, while Q2 GDP growth slid to 2. 5 percent. The continued intervention removed local currency bonds from both the JP Morgan and Barclays indices, and the US and EU both filed WTO complaints that foreign exchange restrictions were free trade violations. Multinational companies also warned about reneging on previous oil production-sharing contracts, which often date back decades, under comprehensive review by the President’s team. They were further startled by the hefty $5 billion fine imposed on South Africa-based telecom operator MTN for disconnecting users, although the public pension fund at home, its biggest shareholder, likewise criticized the practice and acquitted Nigerian authorities of overreach.

South African shares were off over 10 percent on the MSCI Index as officials backpedaled on a university fee rise in the face of student protests, with a 3 percent of GDP budget deficit predicted through the medium term as ratings agencies are poised for a sovereign “junk” downgrade with possible breach of the 50 percent public debt/output threshold. Finance Minister Nene lowered the economic growth forecast to 1. 5 percent this year, as mining strikes again shrank Q3 sector activity and the related PMI. The rand has tumbled toward 14/dollar with pass-through inflation climbing to 5 percent. The benchmark domestic bond yield reached 8. 5 percent, and CDS spreads 250 basis points, as the fiscal blueprint mainly looked to higher growth to break the credit deterioration cycle. Ruling party labor union activists have called on the central bank for rate cuts and currency support, and President Zuma has been sympathetic while not trampling on formal monetary policy independence. However that stance may change with the opposition Democratic Alliance gaining opinion backing throughout the country, and splinter groups within the ANC coalition threatening to leave altogether. The President’s waning political strength has allowed a trade dispute with the US to fester over poultry export eligibility under AGOA duty preferences, and sapped interest in post-Mugabe planning in next-door Zimbabwe amid a severe cash shortage. No successor has been designated to the 90-year old whose frailty was apparent after unknowingly repeating an old speech, with tax revenue, wages and prices all falling under internal devaluation. Chinese aid has pulled back, and the IMF and World Bank cannot resume lending without arrears settlement. To mollify remaining foreign investors, the indigenization law mandating 50 percent local control has been diluted in specific cases, but the MSCI frontier reading has declined 30 percent on the grim outlook.

Ghana has seen a similar setback despite rough observance of the IMF program and a World Bank guarantee for external bond rollover. Local 3-year bond yields are at 25 percent with the 5 percent of GDP fiscal gap through September and fears of additional cancelled auctions. Zambia after initial repudiation has invited the Fund back for talks, as the central bank hiked rates to 21 percent to protect the copper-dependent kwacha. Electricity shortages and poor demand have shuttered mining operations, and another sovereign bond pending IFI imprimatur would entail a spark of imagination.

The EBRD’s Lopsided Transition Tread
2015 November 16 by admin

Posted in: Europe
The EBRD’s 2015-16 transition report focuses on missing financial system features since the last detailed look a decade ago, and in particular on debt buildup and lackluster small business and private equity channels. Despite the end of the credit boom in 2008, the post-crisis debt/GDP ratio has risen 25 percent to almost 125 percent, above the global average for the period. The levels outside Cyprus and Greece jumped most in Ukraine, Mongolia, Armenia and Slovenia and the aggregate proportions are highest in Croatia and Hungary. Hard currency (euro, dollar and Swiss franc) corporate and household exposure is 50 percent compared with 30 percent in other emerging economies, and despite private sector deleveraging government obligations increased to support domestic demand and ailing banks. The investment/output ratio in turn has been stuck at 20 percent, with an estimated $75 billion in annual unmet needs. Non-performing loan loads at 15 percent throughout Southeast Europe and Kazakhstan remain a drag without bankruptcy procedure and distressed instrument remedies.

Of the individual debt categories, corporate growth is still available in a cross-section of countries including Estonia, Poland, Bosnia and Herzegovina and Georgia and could boost infrastructure in particular. In the initial post-communist decade this allocation came to 3. 5 percent of GDP, and governments have absorbed 60-70 percent of the cost, leaving ample room for FDI and capital markets to fill the gap, with public and private equity layers especially lacking. However small firms with less collateral and transparency will continue to be frozen out under tighter conditions and “cumbersome” application processes, according to EBRD surveys. Simplification is urgent in Albania and Tajikistan, and credit registries could otherwise be introduced without legal changes. Leasing, factoring and microfinance are developing as alternatives, but to make real inroads they require a “second phase” of regulatory and statutory revisions, the findings add.

From 2008-14 only 1 percent of global private equity or $20 billion went to the region, and three-quarters was in venture capital deals. The emerging market portion also halved from 20 percent pre-crisis, and in the main targets Poland, Russia and Turkey the activity is less than 0. 1 percent of GDP, with net returns around 15 percent. The EBRD has invested in 100 funds over its history, and retail, consumer goods and information technology have been the leading sectors. Buyout transactions have shown the biggest payouts but typically entail leverage no longer provided by mainstream banks as they cope with new risk-weighted capital and liquidity formulas. Potential portfolio companies have a $60 billion book value, and the number could triple to 2000 and create 40,000 jobs with the right policy help. In 2014 a comprehensive corporate governance analysis revealed major gaps in shareholder rights and board independence. Public equity markets can be an outlet, but only Poland, Romania and Turkey have “fledgling” small business tiers. Private pensions have also been rolled back in the region as a natural long-term investor base. Stock market development indicators put capitalization/GDP under 0. 1 percent for most of the top 15 countries, and diversification had faded with a 0. 8 correlation with Western Europe. The report concludes that economic growth will be flat this year and just 1. 5 percent in 2016, while the financial sector structural reform rankings across banking, insurance and securities are barely positive across the 35 members yet to rebalance the score.

Myanmar’s Pesky Post-Election Pause
2015 November 11 by admin

Posted in: Asia
Aung San Suu Kyi’s National League for Democracy party may have won a parliamentary majority with the military’s USDP conceding defeat, as she repeated her election triumph twenty-five years ago in an historic contest with honored results and fewer irregularities. However the jockeying to name the president as head of government has just begun and will last into early 2016, with the army’s automatic hold on one-quarter of legislative seats helping to shape the choice, and the ceasefire with fifteen rebel groups, excluding the Kachin and Shan independence armies, is also due to be finalized over that period. The packed political agenda omits issues like the rights of the minority Muslim Rohingya who were barred from voting, and human rights campaigners argue that Western trade sanctions should stay in place.