No More Learning

5% as they are in an earlier phase of capital accumulation with favorable demographic trends. “Disorderly” financial markets remain a risk with steeper borrowing costs hurting corporate balance sheets in particular, alongside geopolitical and trade protection threats. For commodity importers output gaps are near zero, and fiscal and monetary policies generally may be exhausted in extending the cycle placing the onus on structural changes that boost investment quality and living standards. Chinese growth will drop half a point to under 6. 5% in 2018, as housing slowdown and bank regulatory crackdown take hold, and ongoing dangers include state corporate debt above 250% of GDP and the aging disproportionately male population. Global trends have been positive with trade volume due to rise 4% annually despite value chain stabilization and spreading tariff and procedural barriers on an estimated three-quarters of G20 member exports. Advanced economy gradual central bank rate and balance sheet normalization has been “accommodative,” with portfolio and banking allocation driving cross-border capital flow rebound with FDI “broadly stable. ” However European bank lines are still “subdued” as they regroup on the continent under common supervisory norms, despite 20% oil and metals price jumps in client countries last year while food values fell slightly.

Industrial production as measured by PMIs is at multi-year peaks, and lower inflation has supported private consumption. Gulf and African energy exporters have struggled with price fluctuations and delayed budget and exchange rate adjustments, with security and social tensions a byproduct. In India investment has been “soft”, while EU structural funds aided Hungary and Poland. Mexico faces NAFTA renegotiation, but smaller Asian economies benefited from China’s Belt and Road infrastructure scheme. Poorer countries reduced poverty, but in one-third per capita income shrank with political upheaval worsening in places like the Democratic Republic of Congo. In this category fiscal and current account deficits fell, but government debt went the opposite for an average 55% of GDP. More trade-dependent emerging markets will reap gains from stronger industrial world investment, but “stretched” asset valuations raise doubts, and impaired credit quality, combined with higher leverage and historic low risk compensation, could spur corporate bond reversal. China could be especially susceptible after a prolonged debt boom and financial stress there would have wide-ranging “adverse” effects. Bank profitability is solid but capital buffer erosion is pronounced in India, Russia, South Africa and elsewhere. The UK-EU Brexit standoff, Korea and Middle East conflict, bilateral and regional trade pact modification, and international migration waves are other obstacles. Oil prices could slip again as green energy alternatives become less expensive and easily connected, and expansionary Chinese fiscal policy may spike public debt as sustainability is a core issue in the larger universe, especially if sovereign contingent liabilities are counted. Better skills and training are vital to future economic health, but the prescription could also worsen inequality in coming cyclical turns, the Bank concludes.

Indonesia’s Flailing Floor Plans
2018 February 10 by admin

Posted in: Asia
The Jakarta Stock Exchange’s tragic floor collapse, injuring visiting high school students, prompted management promise of an immediate “audit” into its cause at a time when investors are probing 2017’s lagging 20% MSCI Index gain against regional counterparts. While they do not consider the incident a possible metaphor for outright cratering, this year’s political, economic and banking system path will remain bumpy to block outperformance. Output passed $1 trillion, but 5% growth is below the 7% President Jokowi pledged after winning office. He faces re-election in 2019 and provincial polls this June, with rating agency Moody’s noting the calendar’s “likely slower reform momentum. ” Rival Fitch upgraded the sovereign to BBB in December and praised monetary policy limiting volatility and capital outflows, but also cited poor government revenue collection and lingering “structural weakness. ”

The President brought the Golkar party into the ruling coalition to advance his anti-corruption and infrastructure development agenda, and parliamentary speaker ally Setya Novanto now confronts bribery charges along with other members of the legislative and commercial elite. He has used several ruses to evade trial, although his behavior follows a 2015 pattern when a tape recording exposed an extortion attempt toward miner Freeport McMoRan. Jokowi was already in political peril after his protégé lost the Jakarta governor’s race amid allegations of Islamic blasphemy, as religious controversies continue to interfere with economic modernization initiatives including industrial sector external opening. Conservative clerics and protectionist advocates oppose further foreign entry into banking, where the ownership cap is 40%, despite administration overtures to China and Japan in particular.

The government and the World Bank forecast 2018 GDP growth to repeat above 5%, after commodity export recovery and increased capital spending offset tepid consumption last year. The trade surplus from coal, natural gas and palm oil sales hit a five year high at almost $12 billion, expanding reserves to $130 billion to cover eight months imports. The budget deficit came in barely under the statutory 3% ceiling, as Finance Minister Sri Mulyani Indrawati admitted tax targets were too ambitious to raise inflows to 15% of GDP, subpar by emerging market standards She said stricter enforcement, combined with simpler filing procedures, would not relent during the election season, and claimed that the broader anti-bureaucracy campaign at the core of Jokowi’s blueprint led to a 12% FDI jump in rupiah terms in the third quarter of 2017.

However natural resource nationalism is a pervasive influence smothering technocrat reassurance, and continues to scuttle multinational company plans. US miners Newmont and Freemont had to sell stakes and expand local investment, and state-owned Pertamina swallowed foreign energy assets. To fund these acquisitions, Indonesian public and private firms have accumulated foreign debt, which was up 9% to $350 billion or one-third of GDP last year according to the central bank. The government had $60 billion in bonds outstanding, 40% of the Emerging Asia total, as of last June and state enterprises have jumped in with rupiah-denominated “Komodo” issues to pay for deals and infrastructure projects the budget does not cover. The President’s $350 billion road, water and oil and gas development package quickly reached domestic limits with credit rising annually at a below 10% cautious pace, despite benchmark interest rate cuts through mid-2017. Banks were burned previously by state-directed corporate and personal lending, and are working to strengthen franchises with inflation in the 3-4% range and the currency steady at 13,500/dollar under regular intervention and tight trading rules.

The Financial Services Authority head Wimboh Santoso, formerly with the IMF, is now on a mission to attract additional outside Asian bank lines and presence to fill the gap, and the central bank recently opened a representative office in Beijing toward this end. The 40% international ownership lid dates from 2012, when Singapore’s DBS tried to gain control of high-profile Bank Danamon and was rebuffed. Japan’s MUFG in December agreed to buy it in progressive slices, first at 20% for $1 billion with an eventual goal of a complete takeover at $6 billion, provided Indonesian regulators waive the limit as they have for smaller deals. Santoso will decide the parameters and timeline and said he expects a “quantum leap” in products and services for approval, in contrast with the Jokowi era’s small financial sector bound. to date.

Tunisia’s Demonstrated Addled Adjustments
2018 February 4 by admin

Posted in: MENA
After a 7% MSCI gain in 2016 to match rival Morocco, Tunisian shares were spooked early in January as nationwide protests again erupted on the seventh anniversary of the previous Ben Ali regime’s ouster to coincide with popular anger against staple price hikes to curb the budget deficit under the IMF program, where the second review to release $1 billion was delayed over lackluster results. Security forces arrested hundreds of participants including opposition party activists, as the prime minister acknowledged grievances with insistence that low-income subsidies would be preserved. The Fund compiled a defense of its policies under the $3 billion 4-year arrangement, which succeeded the original Arab Spring one, in the form of a question and answer list admitting “short-term hurt” with fiscal measures against the “unsustainable” wage bill in particular, among the world’s highest, which accounts for half of spending. They also increase VAT on luxury items but keep basic food product protection, with recommendations to place pension and health services on sounder financial footing. Structural reforms such as state bank and enterprise restructuring have progressed at the same time to enable likely first quarter Board approval of the next installment, the text suggests. Following the pattern in North African neighbors Egypt and Morocco, which recently widened its fluctuation band, the authorities will consider greater exchange rate flexibility and dinar deprecation to aid competiveness, especially with external debt at 80% of GDP with reserves down to three months imports. The official salary adjustment emphasizes voluntary exit and early retirement rather than layoffs, and social spending like cash transfers for medicine and education are maintained while the fuel price hike targets wealthier households, according to the analysis. Anti-corruption and business climate improvement steps are in the mix, with new investment and banking laws despite a controversial amnesty for company and individual repatriation of questionable wealth accumulated under the old government. Financial inclusion is a supplementary focus to embrace micro and small firm credit, digital payment and central scoring and information bureaus. The IMF points out that it charges 3%, half the yield on Tunisia’s 2017 Eurobond, and that 30% youth unemployment is a paramount priority that can best be tackled through the program’s creation of private sector productive jobs.

The month before the EU was under fire for keeping the country on a tax haven blacklist as French President Macron prepared for an end-February trip since special rules remained for exports and financial services. It was named along with fifteen other “non-cooperative” jurisdictions, and the Tunisian President condemned the action as blocking transition to a “21st century state. ” The UAE, where shares dropped 1% on the MSCI index last year as one of the few losers, was also on the roster for missing a deadline for tax information sharing. Dana Gas was an exception to the exchange damage, with a double-digit surge on apparent victories in contractual disputes. It won a $2 billion arbitration claim against Iraq’s Kurdistan region for non-payment, and local courts may uphold its failure to honor a $700 million sukuk which lawyers argue was sharia-non-compliant despite an English tribunal ruling for creditors like Black Rock and Goldman Sachs. Appeals may drag on for years placing deals and the industry at mutual risk pending definitive divinity scholar direction, according to experts.

The Seamless Rally’s Frayed Fabric
2018 February 4 by admin

Posted in: General Emerging Markets
Emerging bond and stock market performance in 2017 exceeded the most optimistic early year scenarios, largely focused on feared global monetary and trade squeezes that proved overwrought and quickly faded to pave the way for uniform rallies. Benchmark indices were up double-digits, led by the MSCI’s 35%, with almost all country constituents in core and frontier and local and external measures along for the ride in a pattern last seen a decade ago right before the global financial crisis. Then a Shanghai Stock Exchange “shock” was originally felt in New York and other centers before the mortgage meltdown.

Combined investment fund flows last year at $200 billion mirrored the previous peak, with ETFs that have since mushroomed accounting for respective 10% and 25% portions of debt and equity allocation. Better than expected corporate earnings and average GDP growth, again approaching the 5% level of boom periods with higher exports and domestic demand, bolstered enthusiasm as a mix of positive underlying story and low-return advanced economy aversion. However the embrace did not distinguish between asset classes and leaders and laggards within them for a longer term winning strategy, and overlooked banking system and geopolitical icebergs lurking beneath the surface. Financial stability may again be a prominent theme after years of post-crisis relief, as private sector leverage rings alarms and the public sector running steeper fiscal deficits has limited rescue space.

In stock markets by region Asia outstripped Latin America and Europe in the core universe, with MSCI’s addition of Chinese “A” shares and buoyant company profits in the global tech cycle were key drivers. These factors neutralized continued worry over China’s banking stress, corporate debt overhang, and capital outflows which were prominent topics at the Central Economic Work Conference going into 2018. Authorities have already announced crackdowns on shadow “entrusted loans,” state enterprise leverage, and bank card holder dollar deposit withdrawals, and signaled further moves with financial stability a Party priority. In contrast with 2008, economic and credit spillovers from potential crisis would now slam emerging market bonds as well, where foreign investor corporate and sovereign exposure ranks near the top globally in volume trading surveys by the industry association EMTA. Asian neighbors Korea, Malaysia and Thailand are grappling with high household as well as business debt levels, regularly drawing warnings from the IMF and the BIS, which will be tested this year as allocation turns more selective, according to the latest Bloomberg fund manager polls. Korea’s central bank stood out last year by hiking interest rates and imposing credit card “macro-prudential” curbs to shrink OECD-leading 150 percent of GDP personal leverage.

In Europe, Russia lagged with a barely positive MSCI result despite low valuations, as it may face more Western sanctions for election interference, with the US Treasury Department considering a government bond buying ban. It took over systemically-important private banks and had to close hundreds of others for prudential violations. Turkey’s 35% rise was at the opposite extreme, but was due to post-coup attempt official loan stimulus overheating the economy and stretching the banking system, which has to rollover heavy foreign exchange obligations. Foreign investors as the largest owners trimmed local bond positions in Hungary and Poland, as they recoil at populist administrations courting EU condemnation and aid suspension, and fear that domestic institutional investors lack backup capacity after private pension fund shutdowns.

Latin America has a nonstop 2018 election calendar with presidential contests in Brazil, Colombia and Mexico, with the main parties and their standard bearers offering scant commodity diversification and productivity raising platforms under scandals and criminal investigations. Brazilian banks, including the development BNDES arm, continue to deal with large corporate borrower restructurings, such as with telecom firm Oi. Argentina’s economic policy turnaround and world capital market re-entry under President Macri, which resulted in record borrowing and a near 75% MSCI Frontier Index bounce in 2017, is offset by Venezuela’s implosion under a harsher socialist regime bringing hyperinflation, debt default and a singular humanitarian catastrophe.

Frontier market stumbles in the Middle East and Africa left the composite gauge 10% below MSCI’s main roster, as Gulf and Southern African components suffered respectively from the Qatar boycott and South Africa-Zimbabwe political transition jitters, which have also hurt bank liquidity and profitability. A big warning to the overall asset class is the Institute for International Finance’s lending conditions survey stuck around the neutral 50 mark, which fund managers have yet to flag it for future momentum drag. They will better pick their spots in the coming months, and although stock returns likely will continue long-term catch up with bonds, variation will widen by geography and development stage through the financial sector health filter.







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Iran’s Botched Banking Rescue Roar
2018 January 29 by admin

Posted in: MENA
The Tehran Stock Exchange’s one-year performance in dollar terms showed an 8% gain into December, one quarter the almost 35% MSCI emerging market surge, as mainly working class protests first erupted in the second city of Mashhad over pocketbook economic and credit hardship. Just before the massive “bread and jobs” rallies the International Monetary Fund in its annual Article IV consultation underscored the urgency of bank bad loan removal and recapitalization, amid preliminary steps to place unregulated lenders under central bank control and shut them down if violating prudential rules. They have been closed suddenly without public notice, and small savers lured by higher rates beyond the mandatory 15% ceiling have lost or been unable to access accounts without a formal deposit insurance system.

Many of these underground providers have ties to the Revolutionary Guard(IRGC), which dominates the economy with major stakes in stock exchange-listed companies, and their collapse coincided with first-ever budget disclosures that it is in line for multi-billion dollar allocations while consumer subsidies face cutbacks to achieve fiscal balance. The IMF mission pointed out that additional government debt to cover bank cleanup will reinforce pressure and recommended ending tax exemptions benefiting the giant bonyad religious foundations in particular. President Hassan Rouhani won reelection campaigning for financial system modernization and integration, but has been stymied by officials and legislators in the revolutionary “old school” Supreme Leader’s camp. Their resistance has delivered a body blow to income improvement aspirations under nuclear deal sanctions relief, which the US may now roll back under the Trump administration’s tougher “decertification” stance. It urged the demonstrators to continue regime confrontation and prepared to reinforce IRGC punishment for military action in Syria and the region, while foreign investors from Asia, Europe and the Middle East focus equally on the banking crisis stalemate.

The President reprised his second term mantra after the protests spread nationwide by declaring the need for “major economic surgery” and referring to illegal credit firms as a “tumor. ” GDP growth has rebounded to the 4-4. 5% range with oil exports back to capacity, but inflation again is at 10% on higher food and fuel prices while youth unemployment is estimated at double to triple the official 12% level with millions of skilled professionals emigrating for jobs overseas. In the speech he asserted that the government must be accountable for corruption, with state and partially-privatized banks that dominate the $700 billion industry a prime conduit for insider deals resulting in scandals, including popular outrage last year around chief executives receiving hundreds of thousands of dollars in salary. The Fund’s Article IV statement ticked off a series of overdue measures to restore confidence and conform to frontier market norms, including a comprehensive audit and related-party loan bar, and a “time-bound” plan to write off real estate and other dud assets calculated at 20-30% of the total under international accounting standards. It also called for finalizing anti-money laundering laws to meet a Financial Action Task Force end-January deadline, and for a freer exchange rate after it tumbled 10% against the dollar the past year despite central bank intervention.

Since the Joint Comprehensive Plan of Action was inked two years ago lifting cross-border restrictions, almost 300 foreign banks have forged correspondent relations with Iranian counterparts. Chinese trade and development specialists have the largest lines under the Belt and Road initiative, with $25 billion recently committed for energy and infrastructure projects. Russia’s Export-Import Bank signed agreements in early January, and elsewhere in Europe smaller commercial institutions such as in Austria have been most active to avoid remaining US secondary sanctions. However they continue to steer clear of direct and portfolio investment participation as no profits are projected at the main state banks in the latest budget blueprint, after direct borrowing from the central bank rose 15% as of October. Financials, including government-run pension funds and investment companies deep in the red, have long been stock exchange laggards, with price-earnings ratios often below the five times average. Recently a new private bank IPO was completed and ailing Bank Maskan lost its housing monopoly to spur competition, but the balance sheet remains overwhelmingly negative with leading listings Mellat and Tejarat suspended from trading for lacking financial statements as investor protests also grow louder.







African Private Equity’s Tricky Confidence
2018 January 29 by admin

Posted in: Africa
Deloitte and the East and Southern Africa Private Equity Associations released their annual survey of industry economic and asset class attitudes from 75 respondents highlighting “adaptability and agility” despite deal and growth difficulties. In the latter sub-region manufacturing is increasingly popular next to energy and real estate and although 60% believe South Africa’s economy is in bad shape 80% plan greater allocation. The East’s 6% growth leads the continent and is “coming of age” despite controversial presidential elections in Kenya and Rwanda and stricter regulation in Tanzania. New fundraising is up as first stage PE vehicles reach maturity and local pension funds subscribe, but at steeper entry multiples with rising transaction competition. Small business is a current focus, especially in agriculture and financial and retail services, and renewable energy is a major technology play. Of the limited partners asked 15% expect exits in the coming year, whereas none were contemplated in 2016. Sub-Sahara Africa GDP expansion is forecast at 2. 5% in 2018, with “muted” commodity price advance. The East has experienced prolonged drought, and Ethiopia is now the largest economy and growth champion, with 10% jumps the past decade from domestic demand and infrastructure as it slowly opens to foreign investment. South Africa has been in recession amid sovereign ratings downgrades close to junk, and Mozambique will join Botswana and Malawi in 5% growth despite its external debt travails. In the West Nigeria has stabilized with wider foreign exchange availability and Cote d’Ivoire, Senegal and Ghana should see 7% range output upticks over the medium term. PE activity will climb in all three areas the next twelve months, but most in the West with Nigeria’s predicted turnaround, according to the research. Existing funds should be fully deployed in 2-4 years, and among countries Ghana, Tanzania, Rwanda, and Cote d’Ivoire have emerged as preferred destinations.

By sector the consumer is the top priority, especially in food, healthcare and pharmaceuticals. Small and midsize and mature companies are equal emphasis, and typical fund size runs from $50-$200 million-plus, while deals are around $20 million. General partners differ by geography, with governments and development banks dominating the South and West and endowments-pensions the East. Europe is the main external source, followed by South Africa and the US. Debt finance is due to rise alongside equity, and the main exit paths are strategic and secondary market investor sales. The return time horizon extends beyond five years, and backers tilt toward mid-size Pan-African strategies. Corporate governance and transparency are the chief domestic issue challenges, with owner-manager distinction an important underappreciated concept. Internationally, Brexit’s impact on bilateral trade and signaled US protectionism are high on the list. The Trump administration’s initial budget blueprint recommended big African aid cuts, and AGOA’s duty-free preference extension is under review for several signatories, while the older GSP poor-country program may not be renewed. The new heads of development agencies AID and OPIC expressed commitments to economic growth and venture capital fund support, and the State Department held a summit with dozens of foreign ministers, but a bungled counterterror operation in Niger has overwhelmed the joint agenda with possible future supplementary private capital dimensions yet to offer confidence.

Corporate Bonds’ Evenly Dispersed Blessings
2018 January 21 by admin

Posted in: General Emerging Markets
The CEMBI’s 2017 8% return was slightly lower than the previous year’s 10%, but gains were equally distributed between rating and regional segments, JP Morgan commented in its annual asset class roundup. High yield led results at 45% of issuance, and by industry commodities including hydrocarbon and mining names were the winners. The benchmark spread has dropped the past two years with low volatility reminiscent of the early 2000s period, when the margin was lower than the current 230 basis points over Treasuries. Duration has been steady at 4. 5 years, and the CEMBI Broad traded inside the sovereign EMBIG Diversified in 2017 due to a combination of Asia high-grade credits in the former and distressed weighting Venezuela/PDVSA, continuing to miss payments, in the latter. High-yield in turn has been tighter than the US counterpart, likely because of the universe of well-supported quasi-sovereigns. By geography Latin America and Africa were the top performers (+12%), followed by Europe, Asia and the Middle East in declining order although their range was a narrow 5-7%. The external sovereign and local government JP Morgan indices had respective 9% and 15% gains but also fluctuated more widely. The biggest individual issue surge was from Petrobras (+17%) and other Brazilian banking and industrial components also shined. China listings like CNOOC, Bank of China and Evergrande were likewise major contributors, according to the research.

Speculative-grade default rates fell to a six-year low of 2%, with the number halved to sixteen from the preceding year, as “robust” refinancing conditions enabled weak story access. Latina offshore spilled over into 2018, as Noble and Agrokor hurt Asia and Europe, respectively. Venezuela state oil company PDVSA did not enter the total, even though derivatives body ISDA and ratings agencies declared default while the government intends an as yet undefined restructuring. Recovery values almost doubled to 50%, with the bottom levels in the consumer and financial sectors. Leverage was the same as in 2016 at 3 times, with Latin America the most indebted region. The rating upgrade to downgrade ratio was 0. 8, with Argentina getting 15 promotions after S&P raised the sovereign to “B. ” Turkish companies were slashed an equal number with Fitch’s BB+ cut, while China had the most downgrades at 55 versus 30 upgrades. The Middle East and Africa suffered with South Africa and Qatar actions, which may fade under the prospect of fresh ANC ruling party leadership and lifting of the GCC boycott this year. Primary activity was a record approaching $500 billion, 50% above 2016, with net financing “manageable” under $150 billion. Tenders and buybacks were a hefty $80 billion, and Asia was over half of volume at $300 billion with “sustained” local investor support, the survey notes. China was $200 billion, with Korea next at $25 billion and financials were half of regional supply. In Europe Russia marked its post-sanctions rebound with $20 billion, although new US Treasury Department guidance could again close the window. Regulation S SEC-registered private placements were 55% of the total, beating the previous year peak, and debuts were one-fifth of all transactions, another precedent in value terms although not in issuer number. Asia had 125 maiden offerings, with ASEAN active in particular under longstanding bond market promotion programs.

Asia’s Fleeting Triumph Trundle
2018 January 21 by admin

Posted in: Asia
Emerging Asia core stock markets outperformed Europe and Latin America ones in 2017 with a 40% gain, above the benchmark MSCI index 35% advance, with Pakistan’s over 25% drop the sole loser. China “A” shares jumping almost 50% as they prepare for a larger weighting were the main turnaround story and driver, followed closely by South Korea’s 45% shaking off the North’s bellicosity to herald the new administration’s chaebol and consumer debt cleanup. India was next at 35%, ahead of ASEAN markets where Thailand led (+30%) and Indonesia, Malaysia and the Philippines finished in the 20-25% range.

Among frontier exchanges Vietnam’s 60% surge was more than double the index, while Sri Lanka was flat and Bangladesh rose 15%. The universal upswing was supported by headline GDP growth and earnings exceeding expectations, and positive trade and capital flows overcoming gloom from US and Western government protectionist sentiment and incremental monetary tightening. However on entering 2018 banking and foreign investment clashes in regional linchpin China again weighed on the outlook, while fund managers positioning for more selective returns began to dissect neighbors’ underlying economic and financial system diversification and overhaul in view of political and practical limitations.

China’s December official manufacturing PMI was over 51, but masked a meager 5% rise in private fixed asset investment, a one-year low. Both the local and offshore renimbi were up 7% against the dollar in 2017, but the foreign exchange body SAFE started the new year with stricter individual bank card holder caps on domestic and overseas dollar withdrawals, with the latter set at $15,000 annually. The National Development and Reform Commission in turn issued a directive mandating on-line registration of all cross-border deals above $300 million, and requiring approval for “sensitive” media and defense-related transactions regardless of size. The capital exit crackdown was coupled with foreign investor overtures, including temporary tax exemption for “favored” sector allocations such as in mining and technology in response to President Trump’s global corporate tax cut. The Commerce Ministry promised to speed financial services opening after a bilateral summit agreement , but the banking regulator still will not allow international ownership of domestic units over 20% for a single shareholder and 25% generally. Washington signaled its disappointment with access by refusing the proposed Ant Financial takeover of MoneyGram on reciprocity and national security grounds, as the Treasury Department’s CFIUS panel flagged account piracy and cyber-espionage potential.

The Central Economic Work Conference met to endorse the “Xi-nomics” mix of progress and stability and the medium term 6. 3% growth target, as state-owned forms announced double-digit profit increases for the year. However the private sector China Beige Book pointed to retail industry revenue and cash-flow weakness which will delay “old economy” displacement, especially as commodity sector companies such as steel once more ramp up capacity and production contradicting previous pledges. Central bank head Zhou in his message vowed to maintain prudent monetary policy, as big state lenders were poised to enjoy an interest windfall from a 2% available reserve requirement cut around the Lunar New Year, which will not apply to smaller competitors whose shares plunged. The Finance Ministry offered its own mixed signals in describing the “illusion” of Beijing continuing to absorb local government debt, which reached $2. 5 trillion in November, as over half of current bond issues roll over old obligations under the existing program.

Korea’s 10% currency appreciation against the dollar topped the region, and it was the only country to raise interest rates to try to slow accumulation of personal debt now the highest in the OECD. India reprised 6. 5% growth in the last quarter but worse 5% inflation came with it, and Prime Minister Modi’s ruling coalition lost ground in his home state of Gujarat and now faces a dedicated opposition Congress Party with Rahul Gandhi officially elected leader. In ASEAN Indonesia moves into 2018 split between prominent infrastructure building forays abroad, with state company issues of rupiah-denominated “Komodo bonds,” and religious and anti-corruption infighting at home, with President Jokowi’s key ally the parliamentary speaker facing graft charges. Vietnam managed successful IPOs, most recently of a popular brewery, but has struggled with corporate debt placement. It may soon tap the Asian Development Bank for help in a snapshot of Emerging Asia’s uneven financial market path despite 2017’s linear rally.







Mongolia’s Daring Debt Dash
2018 January 15 by admin

Posted in: Asia
Mongolia was lauded for more “durable than anticipated” 3% GDP growth in 2017 in December’s first review of its $400 million IMF program, following an $800 million 5-year external bond return in October where the 5. 5% yield was half the previous peak. Since the May rescue commodity exports have picked up to China in particular with mine closures there and its ban on North Korea coal imports, and boosted budget revenue in local currency terms with the weaker exchange rate against the dollar. “Investor confidence recovery” with the successful international issuance will boost the balance of payments and reserves, and fully cover 2018 maturities and refinance more expensive domestic debt.

However both the Fund and frontier market fund managers continue to be wary as political and banking sector complications dilute the upbeat narrative. The new government elected in July lost a confidence vote ousting the Prime Minister, who was then replaced by his deputy while the Fund’s health check was delayed. Bank credit growth is still at a runaway 20% annual pace, with large foreign exchange exposure and 7. 5% bad loans pending the results of an overall asset quality audit by the central bank. Despite headline economic strides, on structural reform the IMF report assigned a “mixed” score, as regional peers Azerbaijan and Kazakhstan not under the lender’s thumb likewise have rebounded from crisis but remain ambivalent near-term bond bets.

Mongolia’s coal, copper and gold price jump from Chinese demand stoked 5% first half GDP growth, but construction has been negative for four years with excess real estate inventory. The windfall produced a budget surplus through September, but scheduled social and civil servant handouts will result in a deficit, as the 2018 blueprint adopted by parliament could send the overall gap close to 10% of GDP, according to President Khaltmaa Battulga, who vetoed it as against the Fund arrangement. Growth is slated at 4. 2% amid introduction of a progressive income tax, but the President lambasted “inefficient investment projects” pushed by the opposition People’s Party which holds 65 of the 75 seats. A fiscal stability law envisions end-decade balance, but the IMF warns that the government wage bill compromises the target and threatens medium-term sustainability with public debt already at 85% of output.

Inflation was over 8% in October, and monetary policy has reversed course toward easing with a 100 basis point benchmark rate drop to 11%. The Fund urged the central bank to go slowly on cuts as the recent reserve buildup to $2. 5 billion on a stable tugrik may not last. The Bank of Mongolia has regularly dipped into the stash for intervention, even though its currency powers are murky and shared with the Finance Ministry. An updated organic law is to clarify the Bank’s independence and regulatory authority more broadly, but in the meantime its hands are full with the asset quality exercise conducted with accountants Price Waterhouse Coopers. It will screen bank business plans and apply stress tests, with capital holes to be remedied by the end of next year when deposit insurance is due to start. Among outstanding challenges the financial sector agenda is “most important” and funding decisions should not tilt to favored shareholders or jeopardize the public sector balance sheet, the Fund evaluation concluded.

Azerbaijan came in for separate caution under a December Article IV survey with stagflation ending as the hydrocarbon and service industries revive, but banking sector restructuring “ still incomplete. ” Inflation will be near 15% in 2017 after exchange rate depreciation, and increased fiscal spending should be reined in by clear rules before 2019, it recommended. Privatization has drawn foreign investor interest in real estate, and external debt remains minimal at under 20 % of GDP. Fitch Ratings expects positive growth in 2018 muddied by “continued bank asset quality pressure” despite the bad loan cleanup at IBA. The rater was also skeptical about the Halyk-Kazkommertsbank consolidation as the biggest government-owned lender in Kazakhstan following the initial stage of operations merger in December.
Foreign exchange positions may deteriorate as local depositor tenge sentiment continues to swing as measured by dollarization levels, and international bonds were shaken by a New York court ruling freezing central bank reserves in an investor dispute while the overall system is in knots.



GDP Bonds’ Simpler Structure Sanctification
2018 January 15 by admin

Posted in: General Emerging Markets
For the past year official and private sector representatives, acting under the G-20’s original direction, have organized informal working groups and events around possible introduction of GDP growth-linked bonds. The idea first gained notice in the aftermath of the 1990s Asian financial crisis, and more recently for Greece, as an automatic stabilizer with countercyclical risk-sharing when recession or natural disaster hit that can also provide upside in boom times. Argentina and Ukraine followed early post-Brady plan restructurings in offering warrants that pay a premium when growth is above 3 percent, but full-fledged instruments have yet to be adopted in standard issuance and workouts despite concerted pushes from the IMF, Institute for International Finance, and other bodies.

Since the middle of 2016, the Fund has published papers on “state-contingent” debt and the Bank of England and International Capital Markets Association in London have taken the lead on global emerging market investor outreach which resulted in a model term sheet. It indexes coupons and amortization to nominal GDP, has both foreign and local currency options, and would be governed under international law with creditors ranking equally. The framework also contains complex provisions around collective action clauses and statistical calculation which muddy legal and practical understanding. An easier approach would be to incorporate the concept into smaller deals, such as the recent frontier sovereign wave in Africa and elsewhere, to build a credible track record where any dispute from the limited buyer base and transaction size could be handled by independent experts.

The IMF’s May review examined a range of bond alternatives adjusted for economic indicators or weather events and found that other tools can “preserve space” in difficult periods such as international reserve accumulation, fiscal rules, commercial insurance, and central bank swap lines. However, well-designed GDP-formula bonds are more accessible and also promote concrete securities diversification and the more abstract “global safety net,” in the Fund’s view. Its simulations showed that one-fifth of the debt stock in this form would increase emerging economy limits on average 10 percent before debt reached dangerous levels. Real money long-term managers at big institutions are the logical buyers, as they have wider fiduciary scope to balance country welfare with asset returns, the paper argued. However pilot efforts will still demand a novelty premium with liquidity and performance doubts, which could be magnified by data frequency and reporting gaps as in Argentina’s notorious past and in Venezuela’s present case, where related bad governance and economic policies would likely make upfront costs prohibitive. Professional debt agencies and not politicians should be in charge of these operations to plan beyond the next election cycle, and ratings agencies should participate at an early stage, the primer recommended.

Inflation-adjusted instruments offer a foundation and remain popular in Latin America among local and foreign investors, and commodity-tied value recovery rights featured in a dozen decades-old sovereign debt exchanges, but verification lags and other intricacies have impeded mainstream embrace. GDP-linkers will take time to develop benchmarks, and pricing is assumed to be at least 50 basis points over conventional offerings at the outset, according to the literature. Global pension funds controlling $40 trillion may be confined to hard-currency investment-grade exposure to further narrow the structure, while Islamic finance vehicles committed to risk-sharing could be a smooth fit. In discussions on the London term sheet, lawyers have criticized voting and cross-default clauses which seem to prevent aggregation and subordinate “plain vanilla” bonds to GDP-related ones. Analysts in turn are deeply suspicious of government data manipulation in the absence of an established separate mechanism for calculation and publication, and insist in the proposal on possible immediate redemption through a put option for protection.

Instead of mainly relying on these elaborate consultations often with acrimonious debate over motives and principles, GDP-linked bond advocates including the IMF, which has indicated possible balance sheet and technical support, should instead be open to ad hoc insertion in ongoing minor emerging market placements. Leading candidates were the past year’s restructurings in Belize, Mongolia, and Mozambique amid their other outstanding economic policy and statistical disclosure concerns. The three are serial defaulters with fates connected to natural resources, and creditors have been frustrated by continued negotiation and workout impasses which may be more readily overcome with specific data or event-triggered instruments. A standing group of mutually-agreed professional monitors could oversee adapted versions of the template, as innovation champions bypass lengthy deliberations to forge missing links.





Lebanon’s Retracted Resignation Roundabout
2018 January 8 by admin

Posted in: MENA
Lebanese bond prices stabilized and credit rating agencies delayed action after Prime Minister Hariri returned to his post a month after resigning at Saudi Arabia’s behest over his government coalition with Hezbollah, allied with Iran and Houthi rebels in the Yemen civil war accused of firing missiles at Riyadh. He reprised the “dissociation” stance in regional conflicts despite the alignment in effect the past six years in Syria, against stronger Hezbollah fighter support for the Assad regime now prevailing with Russian air power against remaining rebel pockets. Hariri has dual Saudi citizenship and was briefly detained before flying back to Beirut, raising suspicion he was caught in the anti-corruption net for dozens of royal princes held in the Ritz-Carlton hotel. At home his team had finally passed a budget and forged an agreement for parliamentary elections after a decade hiatus. Tourism increased and offshore oil projects were under negotiation since taking office a year ago, although economic growth stayed at 1. 5% under a 145% of GDP world-leading sovereign debt pile, which absorbs almost one-third of local bank assets as the major buyers. One-tenth the budget goes to debt service, and the central bank has resorted to fancy financial engineering to maintain allocation alongside the $7-8 billion in annual diaspora inflows. They are needed also to sustain over $40 billion in central bank reserves to maintain the longstanding 1500 pound/dollar peg. Other fixed dollar relationships in the Gulf have been in the crosshairs with geopolitical fissures, notably in Qatar under commercial and diplomatic boycott which recently extended to Tunisia with refusal of airport access. Lebanon’s scheme is considered solid in the absence of depositor flight, which has spiked rarely during shocks such as the assassination of Hariri’s father and Hezbollah-Israel war outbreak.

Egypt floated its currency after reaching a 3-year $12 billion IMF pact triggering heavy foreign investor bond and stock market inflows, and half the sum has been disbursed so far. Growth improved in the latest quarter to 5%, but inflation soared to 30% with the 50% pound devaluation and electricity subsidy adjustment. The budget deficit hit 10% of GDP mainly due to higher interest payments, as the central bank hoisted benchmark rates toward 20% following “prudent” monetary policy, according to the Fund’s November review. International reserves are at a record $37 billion, double the corresponding 2016 level, to cover seven months imports on combined remittance, and direct and portfolio investment strides. Gulf allies Saudi Arabia and the UAE in turn extended maturities on $4 billion in deposits coming due in 2018. President al-Sisi has targeted their investors to help develop his new desert “administrative capital,” at an estimated $5 billion first phase cost. Private property firms have purchased land and the Chinese will build a commercial center. However potential Saudi sponsors may be rethinking plans with Crown Prince Mohammed bin Salman’s crackdown on wealthy peers, including globetrotting Kingdom Holding chief executive Prince Alwaleed, with a commanding stake in Citigroup. The attorney-general has signaled minimum $100 billion forfeiture from the hundreds of influential business titans under confinement, as next year’s budget hiked spending for the first time in three years on forecast 2. 5% growth aided by the captive payments.

Investor Surveys’ End-Year Party Indulgence
2018 January 8 by admin

Posted in: General Emerging Markets
2017’s impressive debt and equity market streaks are set to continue indefinitely subject to economic growth and inflation adjustments and other caveats focused on global central bank actions and geopolitics, according to early investor pulse-takings. The best year in a decade shrugged off Trump administration and Federal Reserve moves and China and commodity price worries that will remain prominent, and in 2018 EM currencies may not beat G3 ones, according to a limited Bloomberg poll of money managers. Mexico, Brazil, Indonesia and Russia will be outperformers, while China, Argentina, Poland and South Africa should lag. By the main three regions, Asia is favored over Latin America and EMEA, but the often cited “Goldilocks” combination of output, earnings and monetary impetus will be more selective across asset classes and geographies under still buoyant index results, the analysis finds. Turkey is viewed as the riskiest bet as the failed coup repercussions linger, President Erdogan’s allies are implicated in a US money laundering trial, the economy may be overheating with 8 percent growth the past quarter, and interest rates were hoisted only 50 basis points with double digit inflation amid the President’s charge it is on the “wrong path. ” EMTA’s Q3 survey also came out to report steady $1. 3 trillion in trading, with Asia outpacing Latin America for the first time in its two decades history. Local debt, at 57% of the total was led by India at $130 billion, followed by South Africa, Brazil, Mexico and China in the $75-$95 billion range. Eurobonds, split 53% and 40% percent between sovereign and corporate, had Argentina and Saudi Arabia prominent in the former category. Brazil and India instrument dealing was almost equal overall, and China and Mexico ones were tied for runner-up status. Warrant and option turnover was $9 billion for the period and without a detailed breakdown were presumably on Venezuela and other oil exporters with value recovery rights from previous restructurings.

China has not yet entered mainstream domestic bond indices, but should be added next year as the stock market weighting also rises marginally on the MSCI. November economic data were mixed, with retail sales and exports up over 10 percent but fixed investment only ahead 7 percent at the slowest clip in two decades. Foreign exchange sales resumed even though the state allocation body cited currency “balance” and the bank regulator will soon end the waiting period for foreign institution yuan trading licenses. The official growth forecast remains 6. 7 percent amid reports that the deleveraging push may soften at the December work conference. Tech firms not as indebted as large government enterprises now account for 15 percent of output and 10 percent of employment according to official research. The securities overseer has denied over 100 IPO applications although state company profitability is the best in five years. Moody’s Ratings has a stable banking sector , with the shadow segment under tougher rules as commercial lending continues to jump RMB 1 trillion monthly approaching a 15% annual pace. After signaling opening after a Beijing visit by US President Trump, Beijing insisted the 5 percent ownership reporting mandate will not change, as Washington’s new national security strategy criticized China’s “aggressive, mercantilist” system hardly putting international stakes first.

Nepal’s Framed Frontier Expedition
2018 January 1 by admin

Posted in: Asia
After disappearing from early emerging market investor radar screens in the 1990s with a prolonged plunge into civil war and political instability, followed by an epic earthquake and border closure with traditional ally India two years ago, Nepal completed local and national elections won handily by the Leftist alliance of the nominal Communist and Maoist parties. According to initial results they took control of six out of seven provinces and 70% of parliament, crushing the Nepali Congress formerly in power and an array of fringe opponents including anarchists and royalists. Workers abroad in the Middle East and Asia, whose remittances account for one-third of output, did not vote despite court authorization, but likely would have reinforced the pro-left margin since their campaign focused mainly on infrastructure development and economic modernization rather than revolutionary rhetoric.

Following provisions of the new constitution no-confidence motions, a staple of the previous system which resulted in endless cabinet and government reshuffles, will not be allowed for two years to offer unaccustomed calm. Lowland Madhesis among the country’s poorest continue to advocate for more rights and support under the charter, but the incoming administration due to be headed again by veteran Prime Minister K. P. Ohli has vowed to be more inclusive both toward ethnic and income groups and subcontinent neighbors. In his 2015 term in he signed trade and investment agreements with China, and recently signaled a stalled hydropower joint venture may go ahead to diversify from historic Indian dominance. In his victory speech he promised “never witnessed private sector cooperation” alongside a higher social spending agenda, as the sleepy Nepal Stock Exchange index stayed flat post-poll awaiting concrete economic growth and reform breakthroughs.

Nepal’s Chambers of Commerce and Industry have been dubious in the absence of an “implementation framework” for the socialist economy enshrined in the constitution, amid talk of double taxation at the federal and provincial levels to cover increased social welfare payments. Ohli and his team plan public-private partnerships for large projects and small business, commodity and tourism promotion without specifying policies, as capital flight may spike while the vacuum lasts according to critics. They also worry about an expected rise in domestic borrowing, which has been capped at 5% of GDP annually, and favoritism toward cooperatives associated with ruling coalition leaders. Independent economists argue that the government should focus on better managing earthquake reconstruction after 650,000 homes and over one-third of output were destroyed, the World Bank estimated. In December it approved a $300 million credit to follow on the $200 million in the event aftermath, and pick up the pace for the over 350,000 residences still slated for rebuilding. They urge renegotiation of ventures such as the $2. 5 billion dam suspended with the Chinese over contract irregularities on more concessional rather than commercial terms, even though foreign debt is low unlike other low-income economies, in the view of the IMF’s latest Article IV report this March.

The Fund described Nepal as “trapped in a low growth and investment equilibrium,” with GDP expansion averaging 4% the past decade as a regional laggard. Inflation and the fiscal deficit are under control, but state banks and enterprises got almost 2% of GDP in equity support in recent years which should be curbed, the analysis advised. Decentralization under the new constitution could raise budget risks, and without electricity tariff adjustment power supply will stay compromised, it added.

On monetary policy the Indian rupee peg was praised as a “transparent anchor” as demonetization fallout continues to hit local households and firms, but it has been “overly accommodative” with annual credit growth reaching 30% to spur recent tightening. The central bank introduced an interest rate corridor in 2016 to keep medium term inflation within the 7% target range, and uses repos as a liquidity instrument, with banks experiencing shortages around the election period. Financial sector reform was jointly identified as a priority by the Fund and regulatory officials, with plans to modernize prudential standards and enforcement for lending, securities and insurance. On the stock exchange in December the government revived a pledge to divest its 35% ownership and finalized rules for margin trading, but frontier market investors after decades out of the action will hold off at least another few months for clearer weather to mount a daring expedition.





The Yangon Stock Exchange’s Anniversary Angst
2018 January 1 by admin

Posted in: Asia
The Yangon Stock exchange added a fifth telecoms firm listing and launched on-line trading to mark its second year since opening, but the local index was stuck at 475 capping a year of foreign investor disappointment despite passage of a new companies law that will eventually allow access. The Rakhine State crisis, as it is called in official media since the Rohinga population is not formally recognized, has blemished the civilian government’s reputation as the accounts of hundreds of thousands of refugees fleeing to Bangladesh describe human rights abuses warranting UN investigation and possible donor aid cutoff and trade sanctions. ASEAN’s recent Philippines summit suggested that while the region may continue its “non-interference” stance the US and Europe will likely take punitive action. President Trump and his Secretary of State Rex Tillerson have been famously at odds over their personal relationship and diplomatic direction, but were united on a strong warning to Aung Saung Suu Kyi that ethnic cleansing reports should be verified and met with economic and military consequences.

The IMF in a November Article IV visit cautioned GDP growth would come in around 6% for the 2016-17 fiscal year , with bad weather hurting dominant agriculture and construction project slowdown. It added that the tourism and investment impact of the humanitarian emergency had yet to be felt and may be “localized,” and cited risks “tilted to the downside” from banking sector and other uncompleted reforms. They have prevented global value chain integration and poverty reduction notwithstanding the refugee scrutiny, and the Fund urged a “well-sequenced second wave” of liberalization and infrastructure development for viable frontier market status.

Growth above 6. 5% is projected next year on inflation at the same level, and the current account deficit should shrink 1% to 4% of output. The shortfall has been covered chiefly by foreign direct investment, and reserves at three months imports and the exchange rate are “broadly stable,” according to the report. Critics believe that FDI has been sluggish since the National League for Democracy assumed a parliamentary majority in the civilian transition early in 2016, and then unveiled a dozen-point economic plan with scant detail. The Fund estimates the sum at $4-5 billion this year with large data gaps, after a previous spurt on one-time hydrocarbon and telecoms ventures.

The army, which still controls one-quarter of legislative seats, key security ministries and strategic state enterprises also holds sway over economic policy, described as “sick” by the chief advisor to the former junta Dr. Myint. He has expressed skepticism over meeting the end-decade per capita income target of $1,800 and even catching up and competing with poverty stricken socialist neighbor Laos. His vision is private-sector led with a defined social safety net for the disadvantaged, in contrast with the “low delivery and expectations” he associates with Aung Sung Suu Kyi’s administration. Ruling party leaders like U Lay Nyint on the Economic Committee have urged farm export diversification and central bank independence under internal “frustrations,” while asking the international community for patience under existing political and technical limits.

Amid fanfare last week President U Htin Kyaw signed the long-awaited updated Companies Act, replacing century-old provisions, enabling a 35% foreign ownership stake in domestic counterparts and authorizing trading on the Yangon Stock Exchange. It modernizes corporate governance and minority shareholder rights, with an automated registry to be in place with Asian Development Bank assistance. Previously only selected industries like building materials and car distribution were open to outsiders, and a companion 1940 law barred non-resident equity sales. However officials indicated that implementation rules could take another nine months, and lawyers representing overseas investors lamented “missed opportunity” from the delay.

The same pattern applied to new central bank rules for “overdraft” loans, 70% of the $9 billion total, which are made on preferential terms or indefinitely rolled over to lock in customers. Originally they were to be cleaned up under a six-month deadline, now extended to three years, since executives from the industry’s two dozen institutions raised the specter of widespread runs with an immediate crackdown. Amid the standoff, five new state sector-specific lenders in farming, mining and tourism were approved to worsen allocation to favored clients. The central bank itself is forced to finance the near 5% of GDP budget deficit, as an historic hostage to financial system inertia alongside the stock market.

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Russia’s Banking Blockade Blowback
2017 December 25 by admin

Posted in: Europe
Russian shares tried to finish the year positive, as President Putin signaled his reelection run amid swirling allegations of manipulation and back-channel deals during the 2016 US polls and Trump transition aftermath. Former national security adviser Flynn joined other junior and senior campaign officials in facing prison time on criminal charges, with his perjury guilty plea focusing on diplomatic contacts before the administration took office where 2014 sanctions modification may have been explored. The President’s son-in-law in turn is reportedly under investigation for private and early government interactions with top executives of Russian state VTB, a main target of the original bilateral business ban which was reinforced this year with further legislation widening the potential scope against individuals and institutions particularly in the energy and financial sectors. The new reach could include all sovereign debt allocation to be considered in a Treasury Department study, as the foreign investment share in ruble paper stands at one-fifth the total. A pullback would raise pressure on domestic banks to fill the gap after the collapse of two major private competitors, and as they are already over-exposed to corporate borrowers with the twenty biggest accounting for 225% of common equity according to a December report by rater S&P. Concentration risk may be understated as it is “not fully captured” in current reporting which may flout single customer limits and not combine bond investment and credit lines. Large companies have also transferred cash from foreign to local banks, and do not disclose the holdings. From 2014-16 the overreliance intensified with the system’s high interest costs and low profitability aggravated by the oil price crash. Sanctioned Sberbank, VTB, Rosselkhozbank and Gazprombank hold half of the load on their books, without incorporating ruble and Eurobond allocation. For individual clients the ceiling under IFRS standards is put at $40 billion, and Rosneft had $25 billion in outstanding credit alone in the September quarter, the ratings firm noted. The recent failures of Okritie Bank and cohorts, following the central bank’s withdrawal of 250 other licenses, accelerated retail depositor flight to quality and size which injected funds, but companies could further experience losses in smaller intermediaries only partially covered by insurance.

While both leading state banks and corporates have pared foreign debt by necessity over the sanctions period, they owe $100 billion in interest and principal payment in 2018. The amount is manageable but may require deposit drawdown at home and abroad, especially if refinancing channels are constrained by fresh US and ally curbs. To prepare capital spending has been cut on major projects with the exception of a few high-profile hydrocarbons and railway deals. The government has indicated it will be selective in future equity participation, and has ruled out sizable privatizations in strategic enterprises while demanding increased dividends. The top three state banks do not need near-term Western capital market access, but their retail deposit growth will slow and the central bank’s foreign exchange support program dating from the 2015 crisis is winding down. The “specially designated” bank pariah list could also be expanded and secondary penalties applied against other countries under the “Countering America’s Adversaries” law aligning Washington’s political parties on an anti-Putin platform, the review concludes.

The CFA Franc’s Dogged Devaluation Designs
2017 December 25 by admin

Posted in: Africa
The CFA Franc two-decade old peg to the French counterpart and then the euro, with a 50 percent devaluation in 1994, is again under the microscope after recent commodity price decline worsened domestic and external imbalances in the respective Central and West Africa monetary unions, according to a ratings agency report which identifies countries most at risk from currency realignment. CEMAC’s oil export dependence puts it in worse position as current account and fiscal deficits were in the high single digits to national income at end-2016, with $5 billion in reserves covering just over half of monetary liabilities against the 20 percent minimum needed under the French Treasury arrangement. Budget gaps have eaten into liquid assets at the regional central bank, which has also exhausted overdraft facilities to member governments. WAEMU is more diversified with bigger output and leaders Cote d’Ivoire and Senegal register 7 percent GDP growth and better governance, S&P comments. Foreign exchange and fiscal reserves are “comfortable” and the analysis does not forecast formal depreciation but offers a sensitivity index ranking the most vulnerable in a switch. Congo, currently in negotiations on an IMF program with a low “CCC” sovereign grade, is at the top of the list with an 80 percent share of imports/output, the worst fiscal deficit in the two groups and a default record on its $500 million international bond. Its statistics are not reliable or frequent, and although the commercial debt burden would spike the relative damage would be greater in Cameroon, Gabon, Cote d’Ivoire and Senegal with bigger and more regular Eurobond issuance. They may have partially hedged risk through an African Development Bank window but another 50 percent CFA Franc drop would compromise budget positions and hurt ratings. Petroleum exporters Cameroon and Gabon already signed Fund programs and Senegal’s economic indicators are “much better” than in the 1990s. The sustainability debate over the currency regime has been “largely political” reflecting colonial era estrangement and new Asia outreach. In September protests erupted across the zones as Paris under President Macron unveiled a fresh Africa strategy stressing bilateral investment and security improvement, but immediate alternatives are lacking. Monetary flexibility is limited but low inflation in the 2-3 percent range, versus 15 percent for the rest of the continent average, has been a stability buffer outweighing possible competitive gains from devaluation, the review concludes.

Sovereign debt restructuring that may be in play regardless of exchange rate level should follow market-based recommendations compiled by an expert study group, according to the UN’s Economic and Social Affairs Department sponsoring the effort. Detailed templates should be developed for loans as well as bonds, and the more popular fiscal agent could be shifted to a trust structure to more easily bind creditors. Their committees should be free of conflict of interest, including holding credit default swaps on instruments while in dialogue and negotiation. The IMF’s “good faith” requirement must entail information disclosure and prevent arbitrary voting pool designation and is otherwise a “safety valve” to flag egregious behavior. Bank regulators including the BIS should reconsider capital standards and other treatment that foster pro-cyclicality and delay resolution despite both sides earnest engagement, the UN panel urges.

The IMF’s Foregone America First Feud
2017 December 18 by admin

Posted in: IFIs
A year into the Trump administration IMF watchers, as in a recent paper by the Canada-based Center for International Governance Innovation, remark on the lack of “vitriol” toward it as compared with free trade pacts like the TPP and the other Bretton Woods arms, the development banks which originally faced proposed 20 percent budget cuts. The “America first” focus on bilateral commercial deficits and alleged currency manipulation are issues at the center of Fund advice and monitoring, but its technical and understated political nature have not attracted the same multilateral invective as the UN and WTO. The Treasury Department appointees directly responsible are not yet in place and White House relationships outside are thin, although top officials at both places reportedly have cordial relations with Managing Director Lagarde. In April China was not named a currency violator, despite repeated campaign promises, following a Fund assessment that the renimbi was fairly valued. The retreat may have been reinforced by the urgency of getting Chinese help for North Korea anti-nuclear measures, as Treasury Secretary Mnuchin urged stronger exchange rate surveillance. On country bailouts which aid private creditors, senior line appointees Malpass and Lerrick have expressed skepticism in past writings awaiting a new test case. On Greece conservative Republicans introduced legislation in Congress to oppose further assistance and another quota increase until all debts were repaid, but the administration did not support the move or rise objections as a fourth loan arrangement the past decade was finalized over the summer. Secretary Mnuchin also praised current programs in Egypt and Ukraine and technical assistance on money laundering and terror financing. The Article IV report on the US in turn approved “broad objectives” such as tax reform, infrastructure spending, financial regulation and NAFTA overhaul. However its GDP growth estimates were lower than in the submitted budget and it called for open markets alongside better structural policies on education and training as the income inequality recipe rather than blaming trade partners. The fresh team may confront its first large rescue quandary in Venezuela, where it has imposed bilateral sanctions including on future debt exchange and purchase while the sovereign seeks restructuring with reserve exhaustion. The latest quota reform round, after the prolonged delay while President Obama was in office with Republican opposition, may not be concluded until 2019. Early betting is that additional incremental realignment of voting shares toward big emerging economies may be smooth but that more appropriations will be difficult, in view of critics’ push to tap global capital markets instead.

Africa has been an active recent Fund rescue region and assistance was a main topic at a forum between Secretary of State Tillerson and dozens of foreign ministers. Ghana extended its accord until the first quarter of 2019 with $350 million remaining to disburse, under a fiscal deficit goal of 5 percent of GDP next year to be covered by another $1 billion in Eurobonds. Zambia remains in negotiations as copper prices rebounded on Chinese demand and drought ended. Inflation is on track for the medium-term 6-8 percent target range, likely to enable central bank easing and Treasury bill yield decline as off-index investors creep in to shine returns.

The Asian Development Bank’s Yield Chase Chastening
2017 December 18 by admin

Posted in: Asia
The Asian Development Bank’s November local bond monitor covering the third quarter in nine East Asian government and corporate markets showed “strong” 11. 5% annualized growth to $11. 5 trillion in total, but also pointed to higher yields and foreign capital outflows at the end of the period amid lingering qualitative and quantitative liquidity concerns. Advanced economy central bank balance sheet normalization and increased global GDP expansion have not affected financial market stability, but “potential risks” encompass monetary policy and structural features, including the lack of hedging instruments. China continues to dominate regional markets with a two-thirds share, and bond size to GDP is now 70% with Korea and Malaysia leading the pack under that measure. October international selloffs were pronounced in Indonesia and Thailand, as East Asia still struggles to diversify the investor base, according to the report. A periodic liquidity survey found an even split between countries improving and stagnating with Hong Kong, Vietnam and Singapore in the former and the Philippines in the latter. The ADB warned that dealing amounts and spreads suggest longer-term bottlenecks which could aggravate overseas sentiment turn as the current return “chase” abates.

Vietnam was the exception as 2 and 10-year government bond yields fell after a central bank rate cut. In China deleveraging raised costs beyond developing Asia’s better growth outlook, with the ADB prediction at 6% this year on 2. 5% consumer inflation. The marginal uptick has not punctured the simultaneous stock market rally, with emerging Asia up 35% on the MSCI index as world interest rates and volatility remain low on “solid” corporate earnings, particularly in the technology sector. Foreign ownership of local debt jumped to 40% in Indonesia after a sovereign rating upgrade, and most currencies depreciated slightly against the dollar outside a 1% Malaysian ringgit gain.

Domestic bond issuance rose 4% from the second quarter, and Korea solidified its number two position as the market approached $2 trillion. Malaysia and Thailand are next at $300 billion in size, with Islamic sukuk 60% of Malaysia’s total. Indonesia and the Philippines are in the respective $200 billion and $100 billion ranges, and Vietnam is the smallest at $50 billion with a negligible corporate segment, which is one-third overall activity on average. China, which just opened the government market, has the lowest non-resident share at 3% followed by Korea at 10%, where portfolio outflows accompanied military threats from the North. Chinese firms led in regional cross-border placements with $1. 5 billion, while Malaysia’s Maybank and national mortgage company Cagemas had the biggest single transactions in Chinese Yuan and Singapore dollars. East Asia offerings in the dollar, euro and yen reached $250 billion through the third quarter, already 10% ahead of full year 2016, with China and Hong Kong sponsors accounting for 75% of volume.

Bond market-related policy and regulatory shifts were notable over the period, including repo launch in the Philippines; a cooperation pact between securities supervisors in China and Singapore; foreign company authorization for Thai baht-denominated issuance; and approval of a medium-term capital market development plan in Vietnam. They were incorporated into interviews with fixed income sales and research desks, asset managers and strategists, and official overseers across the nine economies to determine prevailing liquidity conditions. By turnover ratio only Thailand, Hong Kong and Indonesia were over 0. 5 for the quarter as active markets, while bid-ask spreads reduced 5 basis points. Average government bond trade size decreased from a year ago to $5 million, with tightening most prominent in China and Korea, the largest markets, due to respective non-bank crackdown and geopolitical drags. Respondents also highlighted structural weaknesses in rank order, from the lack of derivatives and private institutional investors to onerous custody and settlement and tax treatment. Malaysia was singled out as scoring well overall but damaged by recent offshore currency hedging restrictions. Withholding tax is steepest in Indonesia and the Philippines at 15-20%, while Vietnam is in the earliest stage of derivatives development. On the corporate side, secondary markets do not exist in Philippines and Vietnam and liquidity is otherwise “subdued. ” Transparency has improved with available and accurate pricing and financial data through dedicated platforms, but capital and access controls are uneven and may become choppier should bond performance sour in coming months and further compromise category outcomes, the survey implies.

The Balkans’ Lingering Reconciliation Trials
2017 December 11 by admin

Posted in: Europe
As notorious war criminal Mladic was found guilty on almost all counts and sentenced to life for his ethnic extermination campaign during the 1990s, Serbia and Croatia continue to struggle with post-independence legacies of heavy state ownership and political infighting but insist they have opened fresh economic policy and EU convergence chapters to enter the foreign investor mainstream. In Belgrade, which was bombed by Western coalition forces due to Mladic’s actions, the ruling SNS party led by President Vucic, with a technocrat government and a declared lesbian prime minister, remains popular although it is behind in surveys for the mayor’s race in the capital which may be scheduled simultaneously with parliamentary elections. The IMF program is on track with a 1 percent fiscal surplus set this year although civil servant wages and infrastructure spending will rise in 2018. The central bank is on hold with dinar stability around 125/euro and may hike rates soon reflecting global trends. Growth should pick up from the current 2 percent on further consumption and export recovery and FDI drawn in part from privatization sales. The 3 percent pace in Croatia is slightly higher aided by a tourism boom, with international visitors up 12 percent on an annual basis. The sector provides one-tenth of employment and has diverted arrivals from less secure Southern Europe and North Africa competitors. The collapse of retail conglomerate Agrokor, now under officially-directed restructuring, dampened consumption but EU cohesion funds helped fill the gap. The budget shortfall will be under 1 percent allowing exit from Brussels’ excess deficit procedure, but public debt is 80 percent of GDP and unions expect a 15 percent salary increase.