No More Learning

Tanzania, which hosted President Obama when he unveiled the Power Africa scheme, has upgraded transmission lines and will link the domestic grid with neighbors. Government debt in part to finance the effort has crept back to 50 percent of GDP for a half dozen countries, but officials have adopted wage restraint which may be embedded in IMF programs and short term portfolio capital inflows are “relatively low,” the IIF believes, despite occasional dangers as when foreign investors did not rollover Ghana’s Treasury bonds as the Finance Minister reluctantly entered IMF negotiations.

The central bank hiked the benchmark rate above 20 percent with the currency off 30 percent against the dollar and double-digit inflation. In September a $1. 5 billion Eurobond and cocoa board syndicated loan over that amount were raised, so the Fund facility will likely be precautionary to address the “confidence crisis,” the report argues. Templeton continues to buy external bonds as a contrarian play as the stock market is the worst MSCI African performer with bank, consumer and gold listings devoid of earnings energy.

Brazil’s Corrosive Car Wash Streaks
2014 November 28 by admin

Posted in: Latin America/Caribbean
Brazilian securities continued to sell off after the President’s squeaker re- run despite her assent to higher fuel prices and lower state development bank lending converging with the opposition platform as new cabinet speculation focused on Workers Party economic orthodoxy proponents especially Lula Administration veteran Mireilles. The Petrobras corruption scandal exploded further in the aftermath with additional arrests and investigations at home and the launch of US Justice Department and SEC prosecutions. Senior executives and politicians have been implicated in the “car wash” for alleged bribes and money laundering, with construction giant Oderbrecht also named, as the latest quarter financial statements were delayed without auditor signoff pending balance sheet and legal clarifications. The central bank hiked interest rates 25 basis points on depreciation-driven inflation with the real below 2. 5/dollar after resumed swap intervention. GDP growth is barely positive and the primary budget surplus derives mainly from bookkeeping maneuvers as gross debt tips past 60 percent of GDP increasing sovereign downgrade pressure. On the credit front Banco do Brail warned of slowdown and souring consumer and corporate portfolios as normal household borrowing rates hit 45 percent. Petrobras has dragged the MSCI down double-digits and with $50 billion in bond issuance in recent years is the largest CEMBI component as that asset class has continued with good returns and fund inflows versus choppier government segments. Last year’s OGX default has been mired in lawsuits against former billionaire Batista, and smaller firms suspended payments in recent months as S&P warned that downgrades would be twice upgrades in 2015. Energy and water rationing could further damage prospects and deter FDI in particular needed to bridge the 3 percent of GDP current account gap and prepare the 2016 Olympics stage. Mexican stocks were likewise battered by sensational stories as protestors marched on the presidential palace demanding answers on college student disappearance purportedly linked to local drug gangs with official collusion, and a Chinese construction firm was awarded and then lost a contract after reports it owned and had upgraded the first lady’s $7 million private residence. These blows came as a new Finance Ministry hedge was put on against steeper oil price decline, which will hurt budget revenue and potential bidding for Pemex’s first private exploration tracts next year after the Supreme Court dismissed remaining challenges. A trade shift to surplus on auto exports and solid domestic demand readings will sustain 2-3 percent growth as the central bank stays on hold with 4 percent inflation.

On external bonds Mexico as with collective action clauses originally will be the first main issuer to adopt aggregation and pari passu rules suggested by the IMF and private bodies to block future Argentina-like holdout claims. Beyond the initial group, other unpaid funds have joined the New York Court filing for relief as the standoff goes into the year-end expiry of the no better offer legislative clause in Buenos Aires. Minister Kicilof hinted at an improved subsequent negotiating climate as the black market peso exchange steadied with rolling dealer raids.

Turkey’s Explorer Spirit Rediscovery
2014 November 28 by admin

Posted in: Europe
Turkish shares continued to lead Europe with a 15 percent spurt as the Istanbul exchange will soon go public and Prime Minister Davitoglu released a medium-term economic strategy to hoist growth and further curb the current account deficit which has leveled to 5. 5 percent of GDP on lower oil prices and consumer demand. A second sukuk bond was also snapped up after President Erdogan appealed to the investor base with the assertion that Moslems arrived in America before Columbus and that he would build a mosque in Cuba to honor the discovery. Present day geopolitics also proved controversial after attacks on visiting US sailors in the wake of a Treasury Department report on Islamic State fuel smuggling through Turkish intermediaries. Kurdish relations remain delicate after refusal to send troops across the Syrian border to hold Kobani as ill-equipped Peshmerga fighters try to regain ground with support from Western airstrikes. GDP growth is down to 3 percent but inflation with lira depreciation against the dollar touched 9 percent in October. The central bank has maintained multiple rates intact but recently moved to pay interest on reserves and aid export credit. Sales to Iraq and Russia are off but FDI was up 10 percent to $8. 5 billion in the last quarter and record amounts have come in through the errors and omissions column to cover $150 billion in short-term mainly private debt on flat portfolio inflows. Sovereign bonds have been hurt by ratings agency caution over investment-grade status, although Fitch kept its reading and Moody’s delayed action with a negative outlook pending clarification of the surrounding conflicts. Officials have blamed the agencies for meddling in domestic politics and threatened to sever contact, and plan to reexamine their role in global markets as host of the G-20 summit next year. The group agreed in Australia to consider new sovereign debt restructuring approaches at Argentina’s urging, as the IMF formally adopted a preference for early maturity extension in unsustainable cases where Ukraine could soon qualify. According to estimates public debt/GDP is already above the 60 percent that would call in Russia’s emergency $3 billion infusion in the final days of the previous administration, as private issuers with Eastern operations seek relief and court default. In a workout Russian and Western bondholders would be forced to cooperate despite their countries’ strained ties which have sparked additional EU sanctions against rebel military chiefs.

Kazakhstan was the first to insert recommended clauses into bond contracts to avoid later legal complications, and the move allowed for a dual $2. 5 placement after a 15-year absence. The benchmark intended to pave the way for corporate taps as oil price sluggishness and continuing problems at the largest field cut growth to 4 percent. Official have hedged the commodity risk with investment banks and will sell the electricity company and other state holdings on the slumping stock exchange to garner revenue and reprise pioneer popular capitalism from two decades ago.

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Qatar’s Running Cup Caper
2014 November 24 by admin

Posted in: MENA
Qatari shares kept their 20 percent MSCI advance as football governing body FIFA allowed 2022 World Cup preparations to proceed following a corruption inquiry. The host was tentatively cleared of wrongdoing as construction is up 20 percent on an annual basis with groundbreaking for the first stadium and other infrastructure and real estate projects in course. Its reputation was also rescued with stricter Islamic charity rules after concern over ISIS support from international coalition officials, although military backing will be minimal. GDP growth will be close to 6 percent despite the recent hydrocarbon price drop as bank credit jumps 15 percent at home and abroad after a lull on tighter public borrowing controls and the soccer event controversy. Overseas expansion is double that figure with leading banks well-capitalized at 15 percent of assets. Qatar National Bank has been in the forefront and just took a 12 percent stake in pan-African powerhouse Ecobank, whose previous CEO resigned on sweetheart deal allegations. The continent is also a commodities destination as state mining and steel companies head to Kenya, the Democratic Republic of Congo and Sudan and consider gold ventures in Mali and Tanzania. The outward thrust comes as Gulf relations remain sensitive over Qatar’s perceived activism in Middle East disputes and Bahrain complains about luring its professionals with citizenship and compensation packages with the Sunni-Shia tensions there contributing to a 20 percent MSCI loss through November. The ambassador was withdrawn from Doha and many Bahraini families are accused of dual loyalties with fluid geographic ties. A causeway linking the two has been on the drawing board for a dozen years and work still requires billions of dollars in joint financing. The impasse reflects an earlier clash over Arabian Peninsula islands that was referred to the International Court in The Hague. Economic growth is only 3. 5 percent under the political-sectarian stalemate which still spills out into the streets, and ratings agencies point to fiscal fragility with the 5 percent of GDP budget deficit. Onshore banks are shielded by strong retail franchises but offshore players rely on regional diversity for profitability.

The UAE continues as the foreign investor favorite with a near 25 percent MSCI gain on 4. 5 percent property, construction, tourism and re-export growth. Expo 2020 foresees $7 billion in infrastructure outlays with the site to be half solar powered. Airline passengers are up 15 percent and hotel occupancy is almost 85 percent. The Iran thaw has boosted trade and this year’s $30 billion in debt maturities were covered as quasi-sovereign firms can readily access loan and bond refinancing. Kuwait shares have been barely positive despite their larger weight in the revised MSCI frontier index and replacement of the capital markets regulator. The housing squeeze has become another contention point between the parliament and ruling family as oil-driven growth falls below 3 percent with refinery capacity also stretched.

Cyprus’ Foreclosed Recovery Chances
2014 November 24 by admin

Posted in: Europe
Cyprus bond prices firmed after proposed foreclosure laws still favorable to borrowers to handle the 75 percent bad construction loan ratio were overturned by the courts to release the delayed $450 million international rescue installment. The IMF has expressed doubts about reform commitment against “entrenched political interests” although ratings agencies have recently upgraded sovereign readings. Economic contraction will be 3 percent this year and could worsen with the onshore banking collapse and skittish offshore flows reflecting the Russia-Ukraine mess. Nonperforming assets are equivalent to almost 150 percent of GDP and private capital raising can succeed only with buoyant European high-yield conditions and residual appetite from Greek offerings which may fall short of meeting ECB stress-test holes even with $15 billion in leftover official facilities from the original crisis program. The stock market has been the worst MSCI regional performer as the Troika puts the financing gap near EUR 15 billion in 2015 which would be covered commercially under Prime Minister Samaras’ exit timetable. Growth then could be in low single digits for the first time since 2008 on budget balance according to the European Commission, but snap elections could bring the Syriza opposition party to power which has vowed to repudiate the accumulated debt load and reverse austerity steps. In Portugal, another stock market laggard, the IMF and EU have slammed results since the May finish with reform stalls and increased public and private debt at a combined 130 percent of GDP level leaving aside the costs of the BES cleanup and transport support. The duo questioned 2015’s 1. 5 percent growth target as the biggest bank Millenium BCP failed the asset quality review under the supervisors’ adverse scenario. Italy and Spain were the major core member worries but only one small lender was deficient in the former as deflation deepens. Political risks abound as a third party alternative Podemos has emerged to challenge the establishment and an indicative Catalonia referendum showed 80 percent for secession in the industrial bulwark. Italy’s Monte dei Paschi was EUR 2 billion shy of standards and still owes the state from a previous bailout. Recession has lingered under Prime Minister Renzi, who attacked excess deficit procedure rules and then agreed to eliminate planned individual and small business tax relief to come in under 3 percent of GDP. Bank lending has declined since 2012 and labor market changes continue to confront stiff resistance by the populist Five Star movement which also aims to abandon the euro.

France likewise submitted last-minute adjustments to keep within range of the threshold although ruling socialist party lawmakers abstained from budget votes. The far-right National Front is ahead in opinion polls as former President Sarkozy resurfaced to claim the mainstream opposition mantle even though he is under multiple corruption investigations. After speculation that Commerzbank would flunk German banks were also cleared by the stress test as Chinese and Russian weakness hurts machinery exports in particular to possibly later expose gearing.

Myanmar’s Preempted Pagoda Pageantry
2014 November 20 by admin

Posted in: Asia
Myanmar prepared to host its first ASEAN summit since admission fifteen years ago as both financial sector and broader economic and political reforms were “stalled” according to international democracy champion and Nobel laureate Aung San Suu Kyi, as she cited ethnic clashes and military backtracking in the two years since opening loosened commercial and diplomatic sanctions. The Muslim minority Rohingyas have been attacked and threatened with expulsion as the free election timetable for 2016 remains skewed by the army’s automatic one-quarter of seats and a constitutional ban on foreign-citizen presidential contenders excluding her. The government leader Thein Sein recently convened a preparatory session dominated by generals as the National League for Democracy party tries to rebuild its grassroots base and candidate bench beyond the famous dissident. The ASEAN meeting’s focus is strategic issues, in particular island and natural resource disputes in the South China Sea. Beijing and Tokyo at historical odds in the area are vying for FDI leadership and the former has concentrated on energy and built a pipeline to Yunnan province after a hydroelectric dam project was rejected in 2011. Japan’s involvement includes technical assistance in launching a stock exchange which has been dormant with two listings since establishment in the mid-1990s. Five companies will be added by the target end-2015 debut with an optimistic scenario mirroring the tiny initial trading volume achieved in nearby Cambodia and Laos. Only local investors can buy shares under existing law, and a handful of off-exchange offerings have taken place such as from the main state agribusiness operator. A regulator has not yet been created and bonds may slowly evolve with planned Treasury instrument issuance. A 30 percent foreign ownership limit is likely under the preliminary framework developed by Daiwa Securities, but Singapore linkages already available for a few enterprises will still be needed for larger positions.

The IMF’s October Article IV report acknowledged “daunting challenges” to economic transition despite 8 percent GDP growth the past fiscal year and new foreign bank and telecoms licenses. Inflation is around 5 percent and the budget and current account deficits are 5 percent of GDP. The exchange rate has stabilized and reserves cover three months imports. Despite high double digit monetary expansion private sector credit is just 15 percent of output. The central bank was granted legal independence but is still tapped for deficit financing. With poverty at 25 percent of the 50 million population by the last estimate purchasing power is minimal compared with other low-income economies in the region. Future oil and gas revenue could readily be absorbed by critical infrastructure and social spending, and planned decentralization may decrease Yangon’s taxing power. Despite approval of several foreign bank branches convertibility obligations under the Fund’s Article VII will not be assumed in the near term. They can deal only with international customers in hard currency and state policy banks have been expanded at the same time as “political imperatives” that reinforce the old order, according to the staff-monitored program.

Cuba’s Primed Post-Sanctions Postulation
2014 November 20 by admin

Posted in: Latin America/Caribbean
The 60-year US embargo against Cuba featured in Florida elections as bipartisan groups called for a rethink of the approach in view of post-2008 reforms introduced by President Raul Castro which were explored in a lengthy Brookings Institution study in partnership with a Havana think tank. It noted “important progress” since new policies were formalized in 2011 including small-business opening and internet access, bilateral debt renegotiation, and pilot state enterprise restructuring to allow price and operating flexibility. This year the foreign investment code was revamped and currency and monetary adjustment joined the agenda, but the economy has been “in stagnation” for over two decades with annual average growth under 2 percent. Capital formation was 10 percent of GDP, half the hemispheric average, as a chronic housing shortage was worsened by non-functioning financial markets. The 2011 guidelines detail 300 steps to update the development model which still prioritize socialist planning, according to the authors. They point out that exports to Latin American neighbors beyond the scope of Washington sanctions are also low and that multinational firms’ local presence is minimal. Less rigid labor rules could spur a diaspora Cuban influx, and even informal engagement with the Bretton Woods institutions could inject confidence and transparency. The reform process remain at “early stage” and has yet to validate profit and industry-specific supervision or mirror China-Vietnam “socialist market” precedents. Agriculture in particular suffers from undue restrictions which prevent food self-sufficiency and export capacity. Currently 500,000 citizens work in private micro-enterprise, one quarter the initial goal, but lack of credit and heavy taxes are outstanding obstacles. In China and Vietnam bureaucracy is not as intrusive and decisions are decentralized, and Cuba’s free trade zone regime around Mariel differs from nearby practice as in Costa Rica where FDI is systematically welcome and subject to predictable law-based approvals. The dual currency arrangement with the convertible and normal peso creates “huge distortions” and unification is set for 2016 despite the absence of a roadmap. Loss-making firms would be bankrupt under market exchange rates and the shift must be gradual to avert general economic collapse, the report observes. A devalued level has been introduced in the hotel and sugar sectors, but alternatives could still be considered including dollarization and “big bang” realignment which would allow fiscal support as a cushion. Non-participation in international financial institutions exacerbates potential hard currency crunch, and the island may have to turn to other sources during the transition.

Pension and subsidy cuts have begun and education and health coverage remains comprehensive with capability offered abroad as in the dispatch of medical professionals to combat Africa’s Ebola epidemic. Creditworthiness could be enhanced by resolving unpaid official obligations, and travel and remittances would increase with further Obama Administration liberalization steps. Old Havana will only stay an attractive destination with development protections in place, and President Castro’s intention to retire in 2018 with a “soft landing” may otherwise be subject to hard realities without an economic revolutionary march, Brookings concludes.

Africa’s Unhealthy Commodity Command
2014 November 17 by admin

Posted in: Africa
Sub-Saharan stock markets continued to reel amid Ebola, raw material price and political scares as Nigeria in particular was off 15 percent on the MSCI Frontier index as the naira fell through the 165 to the dollar band. The WHO declared success in eliminating the virus there, but Boko Haram continued attacks and kidnappings in the North with thousands killed and displaced as the economy withers. GDP growth otherwise has been pared back to 6 percent as oil dips below the 2015 budget assumption placing the recently restored $4 billion excess crude account at risk. The Finance Minister has warned that tax collection at under 5 percent of GDP must improve to fill the hole, especially with traditional election-related spending due to rise. President Jonathan was formally endorsed by the ruling party for another term but his passivity on economic and security policies has raised doubts among supporters and foreign investors who previously were overweight debt and equity. The fiscal deficit is manageable and the benchmark 12 percent interest rate has not budged with the new central bank chief, but reserves have slipped to $38 billion, which covers 6 months’ imports but may not sustain the currency fluctuation mandate instead of outright devaluation. The pass-through weakness may return inflation to double digits and harm consumer purchasing power going into the polls and domestic demand as a safety valve. In West Africa Cote d’Ivoire was on the immediate front line of potential Ebola spread and fallout from the military takeover in Burkina Faso as longtime President Compaore fled after attempting another tenure extension. The borders with Liberia and Guinea remain porous as civil war vestiges have left large undefended swathes of territory. President Ouattara, who is likely to run again next year despite ill health, agreed to receive Compaore who had mediated past regional disputes. The main opposition party continues to boycott the process as growth at 8 percent skyrockets from a low base. The regional bourse awaits privatization listings to keep the budget deficit at 3 percent of GDP as past supplier arrears are steadily cleared. No external bond issuance is planned over the election period as performance on JP Morgan’s NEXGEM index is solid. Elsewhere in the CFA franc zone Gabon’s illiquid bonds have been pressured by the oil price corrections and opposition efforts to unite against President Bongo. Medium-term 5 percent growth will come increasingly from infrastructure spending that has created a minor budget gap as offshore blocks are opened to potential “pre-salt” discoveries from foreign companies with advanced technology.

Kenya stands out with a 15 percent MSCI gain with the 25 percent recalculation of output as per-capita income approached $1500 within the middle-income range. Poor weather and terrorism are the main threats to the 5 percent growth forecast and single-digit inflation, with the central bank likely to keep the policy rate at 8. 5 percent as tax-free infrastructure bonds repeat as a prized commodity.

The Arab Spring’s Eternal Election Season
2014 November 17 by admin

Posted in: MENA
Middle Eastern shares were buoyed as Arab Spring bellwethers Egypt and Tunisia headed into final phase elections four years after ousting single party dictators with economic indicators bottoming and external aid packages back on track. Egypt’s almost 30 percent gain through October led the core universe with parliamentary contests likely before year-end, with Islamic groups due to boycott and seats allotted from approved party lists. President Al-Sisi declared a state of emergency in the Sinai after attacks on soldiers, as his terrorist hard line has resumed international backing from the US and Europe with ISIS fears. Secretaries of State and Treasury Kerry and Lew travelled to Cairo and praised initial subsidy changes and other economic reforms as the IMF may consider a $10 billion program in the context of a global coordinated effort centered on Gulf support which was just boosted $5 billion. A $500 million Qatar loan was repaid and a $700 million Paris Club payment is soon due but reserves have firmed above $15 billion with tourism improvement and capital account inflows. Inflation is down to single-digits on near 3 percent growth but the fiscal deficit still exceeds 10 percent of GDP and the pound has been stuck at 7. 15 to the dollar despite exchange control relaxation. The central bank is monitoring large government securities exposures at leading banks as the stock exchange is planning to lure bond trading. Private equity houses have assembled smaller deals as billionaire Orascom head Sawiris announced his intention to re-invest domestically after settling a $1 billion tax dispute dating from the Mursi regime. Next door Libya’s collapse has sent wealth into both real and financial assets as officials are reported to be helping former army factions there in battling militias. In Tunisia the legal Islamist party came in second in legislative polls behind a secular movement, reverting the MSCI result to positive as the interim technocrats in charge managed to foster public-private sector cooperation. State bank cleanup remains a key impediment to improving 3 percent growth and 25 percent youth unemployment and is designed to accompany debt and equity market development under EU and World Bank technical assistance.

Morocco’s King has devolved more power to parliament as officials are pushing Casablanca as an offshore pan-African finance hub. Budget consolidation has advanced with incremental fuel subsidy cuts and 3 percent GDP growth is again in sight for 2015 with decent agricultural and Eurozone conditions with the MSCI component up 5 percent. Jordan in contrast has fallen slightly with the Iraq-ISIS conflict fallout on energy, tourism and refugee influx, with donors less amenable to closing the 12 percent of GDP current account deficit. Hard currency deposits at one-fifth the system have not spiked with the upheaval, as heavyweight exchange listing Arab Bank strives to reassure accountholders and investors after an adverse New York Court decision on facilitating terrorist funding during a past grim season.

The Balkans’ Fumbled Fund Football
2014 November 11 by admin

Posted in: Europe
Balkan stocks languished in negative MSCI territory with complications in EU and IMF aid programs aggravated by political repositioning as Russian energy and export dependence also dampened economic prospects. In Romania Prime Minister Ponta got 40 percent in the first presidential round but opposition candidate Johannis was close at over 30 percent on an anti-corruption platform which ignores the Fund precautionary deal now on hold pending a new government and revenue to cover social security contribution cuts. GDP growth is under 2 percent on tight fiscal policy and lagging fixed investment due in part to the low use of EU cohesion funds. Industrial output continues to drop and local currency lending has slowed despite consecutive benchmark rate reductions due to last to just over 2 percent with minimal inflation. Bank reserve requirements have also been slashed to reflect ECB norms with euro entry targeted by end-decade. With S&P’s recent elevation all agencies assign a sovereign investment grade although the current account may shift to a slight deficit this year as FDI was stunted by privatization delays. Serbia held a London promotion for its proposed state divestitures including the Belgrade airport, as the IMF began a visit to resurrect a lapsed arrangement officials foresee by early 2015 after enacting wage and pension austerity. Recession was deepened by flooding which hit farm and coal production as Italy’s Fiat expanded its plant despite mixed car sales. The central bank has kept the main interest rate at 8. 5 percent to break currency weakness as spillover from Croatia’s debt troubles also damages confidence. Deflation has taken root with economic contraction with external obligations over 100 percent of GDP. The fiscal deficit was raised to 5 percent of GDP with contingent liabilities from toll roads as the government tries to avoid Fund recourse. Bulgaria eyed another coalition between the GERB and Reformist Bloc as Prime Minister Borisov was returned to office, although elections could again be called if the agreement dissolves. After receiving a Brussels infusion for seized Corporate Commercial Bank an audit found a huge hole commending liquidation which would activate retail deposit insurance but leave external bonds in default. The budget gap will exceed the 3 percent recommended EU threshold and Greek banks exiting Troika oversight face additional capital-raising post-asset review which may involve further cross-border withdrawal.

Baltic share losses have been in double digits despite 2-3 percent economic growth and euro adoption for all three members set with Lithuania’s admission next year. Geopolitical aversion has settled in with the schizophrenic Russian relationship underscored by the continued strong showing of Latvia’s pro-Moscow party as diplomatic and trade ties sour. Lithuanian bonds were recently snapped up and Scandinavian bank domination in the area is still viewed as positive despite Sweden’s repudiation of pro-business parties and interest rate cuts, Finland’s loss of AAA rating, and Norway’s sovereign wealth fund redeployment in light of oil price and environmental patterns.

Greater China’s Delayed Dealing Declaration
2014 November 11 by admin

Posted in: Asia
Chinese and Hong Kong shares sagged as the Trade Connect platform was indefinitely delayed on technical and policy issues as political and financial market development differences between the two locations were openly debated after scant consideration with President Li’s initial announcement. Occupy Central protesters continue to press demands for direct popular elections in the enclave as promised by Beijing in the 1997 UK handover, but they have been careful not to interfere with exchange or investor operations although interruptions have occurred with blocked public passage. They got an audience with the Beijing-backed chief executive and seek specific commitments and timetables for grassroots polls as the Connect project skidded on lingering cross-border disparities on tax, custody and settlement. The daily Yuan 10 billion limit remained intact, but institutional investors considering Shanghai were stuck on fiduciary guidelines which may be difficult to satisfy in view of local divergence from global norms. In reverse the retail players who could access HK must have a minimum Yuan 500,000 account beyond average portfolio worth. Wealthier individuals have already arranged offshore channels and institutions under the RFII scheme have not even used the available quota to date. From a profits standpoint big industrial firms listed in both places have reported an average increase barely keeping pace with 7. 5 percent GDP growth. Capex is down and overcapacity grips many sectors with the main bright spot developed economy higher-end exports with modest US and European recovery. Hong Kong sales at home and abroad were sputtering before the street unrest, with the latter up just 1 percent in December. Fake export activity however continued to flourish as a hot money conduit betting on further CNY appreciation after a brief pause in the previous quarter. Taiwan has largely stayed out of the internal spat, but its President proclaimed sympathy with the Occupy movement as stocks were marginally positive on 3. 5 percent GDP growth and the central bank on hold although it may be regularly supporting a competitive currency level to the chagrin of foreign finance officials. That effort will accelerate with Japan’s surprise QE expansion with the annual government bond buy rising to Yen 80 trillion at longer maturities and also embracing wider purchase of commercial securities and mutual funds. Bank of Japan head Kuroda overruled opposition to the move as European drift into deflation reinforced the mentality of decades-long experience which has persisted despite fiscal and monetary shock treatment from “Abenomics. ” Low public approval ratings and cabinet resignations of female members may have helped prompt the ratcheting with the 2 percent inflation target still elusive.

Rival Korean shares are down as auto and tech production falter exacerbated by strikes and continued executive infighting at chaebol as family and outside owners grapple for control. Along with corporate governance the lack of official accountability in the school student ferry disaster has raised questions there as the North seems to have resumed outreach with informal meetings following Kim’s reappearance after ankle surgery which has yet to hobble nuclear plans.

Doing Business’ Quality Control Quarrel
2014 November 6 by admin

Posted in: General Emerging Markets
The World Bank’s 2015 Doing Business edition has reacted to methodology criticism from an independent expert panel by adding regulatory quality readings to its efficiency list in ten areas drawing in several cases from members’ second commercial city. The top twenty include Korea, Estonia and Malaysia as almost 250 improvements were registered globally the past year. Sub-Sahara Africa accounted for 15 percent of progress and Europe-Central Asia had 85 percent of economies with at least one reform as opposed to the poor score for Latin America and the Caribbean. Francophone Africa and Benin, Togo, Cote d’Ivoire, Senegal and the Democratic Republic of Congo in particular had the most advances, with Azerbaijan, Trinidad and Tobago and the UAE standouts from other regions. The OHADA business code was implemented in the West African Monetary Union on company launch and minimum capital as signatories also adopted common credit bureau rules. The UAE’s shareholder rights overhaul accompanied elevation to the MSCI core universe with new disclosure and related-party transaction mandates. Trinidad and Tobago’s updated insolvency regime provided a fresh rehabilitation option, but the study found that dispute resolution can differ between major cities as with Nigeria’s 450 day average in Lagos, almost 300 days below Kano’s. The tax and permitting systems also vary greatly between country centers, and in the BRICs labor market guidelines including minimum wage are uneven. In bankruptcy “very few” economies have a robust mechanism as defined by the possibility of 50 cents on the dollar recovery, and with property transfer the process can be fast but unreliable, according to the publication. In contract enforcement both judicial and out-of-court procedures are important but specialized commercial tribunals may not be quicker or better equipped than alternatives. In the past decade relative gaps between lead and bottom performers have narrowed, with the real estate ownership shift time between the extremes down two-thirds to 60 days. The overall tax rate fell by almost 10 percent over the period, with the financial crisis lowering thresholds and introducing online payment technologies.

Singapore was number one ahead of New Zealand and Hong Kong, where the rule of law ranking has been eroded as well by Beijing’s backtracking on open elections. Tajikistan despite authoritarian rule moved the most toward the “regulatory frontier” with a one-stop investment shop and fee and tax reductions and establishment of a credit bureau. Georgia had another good year at 15th place despite presidential transition and prosecution of former officials for alleged abuses in bank and enterprise dealings.
Iceland was #12 despite the persistence of capital controls and the continued concentration on fishing, tourism and alternative energy. Taiwan (19) was far above China (90), which had spearheaded the revolt against previous measures as ignoring state capacity. With the Asian Infrastructure Bank founding the challenge is more direct to the Bretton Woods institutions as both sides reassess basic foundations.

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

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

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

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Russia’s Depleted Energy Entanglements
2014 November 4 by admin

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

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

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

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

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

OPEC’s Cranky Cartel Behavior
2014 October 30 by admin

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

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

Asia’s Dodged Currency Maneuvers
2014 October 30 by admin

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

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

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

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

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

Africa’s Oil Fire Singe
2014 October 27 by admin

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

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

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

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

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

Argentina’s Blue Mood Muster
2014 October 23 by admin

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

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

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

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

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

Mexico’s Gross Simplified Salvage
2014 October 22 by admin

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