No More Learning

Preliminary estimates of physical destruction are around $5 billion in Yemen. The UN counted 70 attacks on health facilities in late 2015 and widespread electricity and fuel shortages, with two-thirds of the population getting water from “high-risk” sources. In the four countries 45 million require humanitarian aid, and half of children are no longer in school. Syria has 12 million displaced internally and externally, and Iraq 4 million, and hosting refugees in Jordan has absorbed one-quarter the budget amid a 90 percent debt/GDP ratio as the poverty rate in this cohort remains over 60 percent. Only with a complete reversal from “non-democracy” to democracy and economic freedom shift to strong property rights protection could growth double by 2020, but peace and free-market dividends are remote, with the vicious cycle of ethnic and communal slaughter and payback sweeping the zone, the World Bank cautions.

Greece’s Border Crossing Crevice
2016 March 7 by admin

Posted in: Europe
Greek stocks extended their 2015 cellar MSCI showing with another 20 percent drop in January with worsening pension and refugee pressures, despite a sovereign ratings upgrade to B-minus with a stable outlook on default escape despite the 170 percent debt/GDP level. As the troika launched its latest review expected to last several months, the IMF continued with a firmer fiscal line insisting on 15 percent retirement system cuts as well as higher employer contributions. The central bank predicts first half economic contraction but notes a halt to euro exit speculation as bank deposits rose 2 percent in December although retail sales and the manufacturing PMI are still falling. Credit remains stagnant with only a small increase to the state as business and retail demand slumps, with one-third of households unable to pay their income tax according to a recent survey. A new revenue authority head was appointed as the Transparency International ranking improved 10 places with evasion crackdown, but officials including the Economy Minister continue as targets of corruption and misrepresentation inquiries. Politics is again in the headlines with opinion polls giving the opposition New Democracy party the advantage under a fresh leader, and farmers erupted in mass protest against agricultural austerity policies. A modest 0. 4 percent of GDP primary budget surplus was achieved last year, but roughly equals the additional forecast direct cost of the Mideast refugee crisis in the coming months, as arrivals exceeded 60, 000 in January despite harsher weather. German representatives have tied bailout approval to influx management and pressed for faster establishment of “hot spot” processing centers. Neighboring Macedonia, long embroiled in a diplomatic name dispute with Athens sealed its border leaving thousands more indefinitely stranded. Germany is likewise under fiscal and political strains from absorption with researchers estimating EUR 50 billion annual expense, and 40 percent in public opinion urging Chancellor Merkel to resign over the government’s asylum stance. Bowing to demands for tighter control, she struck a compromise with coalition partners in January to discourage family reunification and add the Maghreb region as an eligible return zone.

Cyprus is in the last phase of its EU-IMF program and will not draw on the EUR 2 billion still available, and also won praise for structural reforms by advancing a dozen spots in the World Bank’s Doing Business reference. It is grappling with pension rescue as a scheme was adopted to compensate funds for losses from the banking system collapse. Bad loans at the two surviving lenders are over 45 percent of the total with no reduction in sight, despite possible mortgage foreclosure action after passage of a new law. In Portugal two banks have been resolved with “little spillover” in Fitch Ratings view, but write-downs imposed on senior bondholders have been controversial. The Economy Minister also admitted the need for additional capital, which will have to come from private sources with government debt/GDP at 130 percent. The EU cited a “big difference” with the leftist coalition over budget progress, with 2015’s deficit above 4 percent, and warned of forthcoming fines and sanctions as a new president was elected with the power to dissolve parliament and the fading post-crisis stabilization formula.

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China’s Latin America Loan Double Trouble
2016 February 25 by admin

Posted in: Asia, Latin America/Caribbean
The Inter-American Dialogue’s 2015 database of Chinese official loans proclaimed a “doubling down” of commitments which were up $19 billion from the previous year to $29 billion. Development and Export-Import funding was the second highest on record, and over the past decade they have allocated $125 billion, according to the statistics compiled in cooperation with Boston University. The bilateral lines topped World Bank and Inter-American Development Bank combined totals, and Beijing also established $35 billion in regional funds mainly for infrastructure. The recipient countries remain the same four—Argentina, Brazil, Ecuador and Venezuela—with one-third directed to Caracas, although Barbados and Costa Rica got small sums last year. Natural resources are the focus, with Brazil credit to Petrobras and soy processors and a $5 billion Venezuela facility to increase oil output. Bolivia also took $850 million for road projects, and despite the absence of policy conditions, China construction firm use is often compulsory. State-owned commercial banks have entered the mix with Bank of China and ICBC participating in Brazil and Ecuador. The report points out that policy banks raised capital in 2015 to enable them to act counter-cyclically to the regional economic downturn, as they expand trade and investment abroad under the “going out” strategy. It adds that the Chinese finance focus on energy and mining can breed environmental and social conflict, and business and political backlash. It has been a “lifeline” in Venezuela’s case, but sovereign debt default may now loom with creeping collapse evidenced in deep recession, hyperinflation and overstretched reserves. The trackers conclude that the raw materials exchange feature may not be as viable in the current commodities climate and that a new dedicated private equity fund for manufacturing my represent future direction. Argentina may fade as a target as President Macri’s team reviews previous agreements, including a parallel currency swap line from the central bank, and Ecuador’s repayment capacity may also be cramped into 2016.

Buenos Aires has negotiated in New York with holdout creditors that have frozen external bond access pending resolution to lift court collection judgments, and proposed a 30 percent haircut offer in contrast with the 70 percent one under the original exchanges. European bondholders and two distressed funds immediately accepted, and the government moved separately to open the syndicated loan market with a $6 billion pool led by US banks. Terms must be approved eventually by Judge Griesa, who issued the historic “pari passu” injunction against all repayment, and the Argentine Congress, which must amend the “lock law” for a revised deal. Although President Macri’s party is in the parliamentary minority recent opposition defections may improve prospects, and pragmatists among the previously-dominant Peronists urge an end to the confrontation. Barbados’ Chinese borrowing was to turn a well-known castle into a luxury resort, as long-stay tourist arrivals rose 15 percent in 2015 to enable positive growth. However the fiscal deficit at 5 percent and public debt at 105 percent of GDP remain steep, with domestic obligations 70 percent of the latter. Privatization of a shipping terminal may bring in revenue and also invite FDI to counter the 5 percent current account gap, as the island’s double external and internal imbalances endure.

The OECD’s Unaccustomed Refugee Integration
2016 February 25 by admin

Posted in: Europe
The OECD, with Turkey and East European members directly affected by the Syrian refugee crisis, has compiled a best practice manual for the range of integration programs, particularly in light of labor market entry difficulties. It recommends customized language and skills training to mobilize the higher education of recent arrivals, where Sweden found that 40 percent had at least high school background. For Central and East Europe absorption is a “new experience,” and they have struggled with policy design long with border control. Early housing, health and subsistence interventions are useful, especially for children whose learning outcomes are jeopardized by poor living conditions and lack of instruction. Registration and tracking systems differ in speed and sophistication across Europe, and initial processing for humanitarian protection can take from a few months to a year without cultural and practical orientation available. Estonia, Greece and Turkey offer courses but they are often full. The Czech Republic and Hungary provide neither language nor job help, while Poland and Slovenia allow the former. Turkey’s career assistance covers traditional textiles and handicrafts but includes computers and the internet. However labor market access when granted typically involves strict conditions, such as testing and waiting periods in Greece and Hungary, and Turkish national restrictions for certain professions. Population dispersal across the country is also advised for burden sharing and employment search, but shelter overcrowding in urban centers is also a main driver. This “secondary migration” should be encouraged in worker shortage areas while keeping in mind the need for surrounding hard and soft infrastructure, the agency points out. Hungary bases a decision on asylum seeker family status, while Poland emphasizes housing cost and supply and Turkey looks at the immigrant share by municipality. Foreign academic and work qualifications can be hard to recognize and verify and specialized industry and scholarly bodies should be recruited to ensure integrity. Results should be weighed against “systematic skills assessments” which Emerging Europe members have not yet prepared. Intensive tailored on-line reading, writing and technical courses may be required and these offerings are currently limited through both government and employer channels.

Physical and mental health are priority issues, and unaccompanied minors present a particular challenge where schooling may be absent or badly lag local standards. Turkey has created special curricula for these students using Syrian teachers, and Slovenia has started to focus on low-education adults through additional evening courses with travel reimbursed. Poland has only a 12-month entitlement window to tap language lessons, but no cap on the number of hours unlike the Czech Republic and Hungary. Germany, which took in a million Mideast refugees last year, has moved to break out appropriations for the separate components with increased attention to the fiscal implications, even if the spending is expected to marginally boost the economy. Near-term integration and language outlays will be EUR 5 billion and accommodation EUR 17 billion, and under conservative estimates the annual total sum will be $25 billion through end-decade. Externally the government is also committed to a minimum EUR 3 billion Brussels aid package to Turkey and added pledges at the February London international conference on the Syria conflict which tried to customize a solution shred.





Iran’s Sputtering Stock Market Sanctions Lift
2016 February 15 by admin

Posted in: MENA
The Tehran stock exchange turned positive for the first time in the latest Iranian fiscal year from March, as anti-nuclear “implementation day” was reached for initial commercial sanctions removal and access to $100 billion in frozen assets. Automakers were a leading sector, after the government offered loan incentives and European joint venture partners returned. With embargo lifting oil production is to ramp up another 500,000 barrels/day, but the global price collapse will not ease this year’s recession, according to the IMF’s December Article IV report. It highlighted urgent “bank and corporate balance sheet repair” that will continue to deter investors, even with the bargain average 5 times price-earnings ratio and nominal stock market capitalization as one of the region’s largest at $90 billion.

Three months ago President Rouhani introduced fiscal and monetary stimulus in an attempt to shake economic lethargy, pending eventual post-sanctions growth from increased trade and investment and eliminated evasion cost which the IMF estimates at 4-5 percent over the medium term. Businesses were short of working capital as a bank liquidity crisis pushed borrowing rates to 25 percent, exorbitant in real terms with inflation at 10 percent. He ordered the central bank to slash the reserve requirement 3 percent to 10 percent to unlock funding, but the dominant state-run banks are already grappling with bad loans at one-quarter of portfolios, particularly in construction where private projects fell 20 percent the past year, according to official statistics. The companion $2. 5 billion fiscal package aimed to support small and medium-size real estate development, and also offered discount financing for consumer durables including autos and housing. The program features 7-year credit up to $7000 for locally-produced vehicles, and a 50 percent jump in mortgage value through specialist Maskan Bank to $20,000 per individual, enough to cover one-quarter of standard Tehran apartment purchases.

By the end of 2015 interbank rates dipped to 20 percent with these steps, but listed banks continued to report profit drops as the government considered establishment of a central agency for bad asset disposal. An updated Money and Banking Law has been prepared to bolster supervision and resolution powers, and bring unlicensed intermediaries that have proliferated under deposit and lending rate caps within oversight, but adoption awaits the outcome of February parliamentary elections, with 300 seats at stake for a 4-year term. Expert Assembly members, chosen every 8 years to name the religious Supreme Leader, are in a simultaneous contest already attracting almost one thousand candidates. Economic policy has been debated on the campaign trail, with capital markets modernization an occasional theme after pilot sukuk Treasury bill issuance and a proposal to securitize payment arrears to government contractors. The September timetable for unification of the formal and parallel exchange rates, with the former strengthening toward 30000/dollar in early January, will be prominent in the next legislative session, which could also pass higher securities levies to bridge the 3 percent of GDP budget deficit following a VAT crackdown in recent months.

Monthly stock market turnover was less than $1 billion in 2015, but some Tehran brokers predict that sum in foreign investor inflows this year with sanctions relief. International fund managers can buy directly with regulatory approval, or access local offerings that include an index-linked ETF and 50-company pool avoiding lingering trade curbs such as on the Revolutionary Guard. Several dedicated hedge funds have started in London, and Asian banks and portfolio managers have been frequent visitors to the capital, which hosted the annual meeting of the Federation of Euro-Asian Stock Exchanges in November. However US interest is expected to languish with its tougher penalty regime, as the Treasury Department has yet to spell out preliminary allocation guidelines and original sanctions are subject to “snapback” with violations at congressional insistence. Company accounting and reporting do not follow global standards and the country’s World Bank Doing Business ranking is at the bottom in 120th place. A former presidential economic adviser commented that mismanagement is as much a part of Iran’s modern history as sanctions, and both need to be convincingly banished for an equity market confidence blast beyond the immediate implementation trigger.



Originally published by Asia Times www. atimes. com



FDI’s Cloudy Deal Dilemma
2016 February 15 by admin

Posted in: General Emerging Markets
UNCTAD’s 2015 global FDI review showed a 35 percent jump to $1. 7 trillion, mainly in industrial countries which recaptured over half the total, but cross-border mergers with “limited productive impact” were the catalyst with this year’s developing economies outlook remaining “cloudy,” the Geneva-based agency commented. The latter flows were up 5 percent to almost $750 billion, with $500 billion to Asia, while commodity-dependent Latin America, Africa and transition Europe saw declines with a particular drop in greenfield projects. The amount was the highest since 2008, and the US was first with $385 billion, followed by Hong Kong’s $165 billion but both increases were due primarily to tax inversion and corporate restructuring. The EU received $425 billion, led by the Netherlands ($90 billion) and UK ($70 billion). France doubled to $45 billion and Germany returned to $10 billion positive allocation after 2014 net divestment. Australia fell one-third and Canada 15 percent on poor mining and natural resources prospects. Mainland China rose 5 percent to $135 billion, with services drawing interest to offset manufacturing weakness. ASEAN was off 7 percent, while FDI into India doubled to $60 billion with government promotion steps. Turkey’s take in the West Asia geography improved to $15 billion from banking industry and other acquisitions.

In remaining regions Sub-Sahara Africa saw drops in commodity giants Nigeria and South Africa to $3. 5 billion and $1. 5 billion respectively, while North Africa rebounded with Egypt getting $6. 5 billion. Latin America was down 10 percent to $150 billion, with Brazil tumbling one-quarter to $55 billion. Chile and Colombia softened, but Peru gained 10 percent and Argentina’s main transaction was Spanish company Repsol’s compensation for YPF’s nationalization. Mexico spurted 15 percent to $30 billion on a flurry of “megadeals” like AT&T’s takeover of wireless provider Iusacell. Geopolitics and raw materials reversal halved Russia and Central Asian neighbors to $20 billion, but foreign investors continued hydrocarbon exposure with Malaysia taking a $2 billion stake in Azerbaijan’s gas supplies. Cross-border M&A was a post-crisis record at $650 billion, with $350 billion concentrated in manufacturing. Financial services slumped but real estate and transportation deals accelerated. Advanced economies took all but $70 billion of the total, and multinational firms cut greenfield projects across the developing world 20 percent. Emerging market stagnation may continue in 2016 with just 3 percent global GDP growth and regional tensions, but currency depreciation and corporate asset sales to repay debt could stimulate appetite, the UN arm concludes.

Brazil’s Petrobras has scaled back its disposal program with indifferent bidding, and instead sliced long-term capital outlays in an attempt to conserve cash as it remains severed from external debt markets. Officials have indicated that government rescue is “only a last resort” as basic monetary policy stability also comes into question with the central bank’s decision to stay on hold despite worsening 10 percent inflation, twice the target range. Observers speculate that President Rousseff, fighting impeachment moves, wielded influence to placate her Workers Party political base. The IMF also downgraded this year’s recession forecast to a 3. 5 percent contraction to heighten alarm and challenge tightening, as both direct and portfolio investors criticize cloudy policy direction.



BRICS’ Reinforced Rheumy Repercussions
2016 February 1 by admin

Posted in: General Emerging Markets
The World Bank’s Global Economic Prospects report blamed emerging economy weakness for paring the 2016 growth forecast to below 3 percent, as it examined BRICS spillover effects by region with their slowdown “sneeze” often resulting in neighbor “colds” as in Russia-Central Europe and China-East Asia. In 2015 the 4 percent GDP advance was half the level of 2010, with “steep recessions” in Brazil and Russia. Country-specific rather than external shocks were the main cause since 2014, and long-term structural drags are prominent. From 2010-14 they contributed 40 percent of global and two-thirds of emerging market output, and dominate trade, commodity and financial markets. Banking and portfolio flows, remittances and FDI take the overwhelming portion, and correlation has increased through these channels. Brazil has influenced Latin America, South Africa the Sub-Sahara and India low-income South Asia. BRICS’ fall has hurt developing 0. 8 percent and frontier destinations 1. 5 percent respectively. Higher risk spreads and funding costs have permeated the asset class and fiscal, monetary and structural policies are struggling to rebuild confidence, according to the update. Productivity and technology ability has slumped, and fallout is obvious elsewhere including in Egypt, Korea, Mexico, Nigeria and Turkey.

Emerging market equity funds were off $70 billion in 2015 as measured by EPFR, with Brazil (-$1 billion), China (-$18 billion), India (+$10 billion) and Russia (+$200 million), and with BRICs altogether at -$1. 5 billion. Frontier markets lost $2 billion and Africa $400 million. Hard and local currency bonds each declined over $12 billion, and on the EMBI index Brazil and South Africa were down while Russia gained double-digits but has sputtered early into 2016. With lower oil prices the budget will be cut another 10 percent as interest rates remain on hold and recession continues. Inflation will dip under 10 percent, and the ruble will further decline from 2015’s 25 percent dollar slip. Banks are under pressure as state-owned VEB seeks $20 billion in additional capitalization and 100 small institutions have been shut. The PMI is at 50 and sanctions against the EU and Turkey will hamper cross-border trade. A London court battle has started with Ukraine over repayment of $3 billion in debt, with former Finance Minister Kudrin under consideration for return. Leading lender Sberbank is scrambling to handle consumer and real estate exposure as European supervisors demand increased support for its Austrian subsidiary.

The India mood is also more cautious despite prediction of repeated 7 percent growth as parliament adjourned without passage of national sales tax and economic statistics including inflation came under investor question. International asset managers, the latest Goldman Sachs with $1 billion under control, have ended operations with stiff competition as regulators often switch rules on distribution and transparency creating confusion. Franklin Templeton with a longstanding presence has the biggest industry share at 5 percent, just behind once-dominant UTI which has partnered with T. Rowe Price. Local government bonds have diverted share inflows with an expanded overseas ownership ceiling as infrastructure projects have hesitated to launch despite official approval. Prime Minister Modi after state election setbacks has invited Congress Party head Gandhi for belated talks as the two try to drain personal and political animosity.

Europe’s Refugee Surge Protective Seal
2016 February 1 by admin

Posted in: Europe
The IMF circulated a paper at the World Economic Forum in Davos weighing in on the Syrian asylum seeker debate with evidence of a short-term GDP growth boost from refugee influx despite fiscal costs, and recommendations for labor market and financial services integration for longer-run positive effects. It cited the UN figure of 60 million displaced globally, one-quarter officially refugees found to flee persecution and violence, from the Middle East as well as Africa and the Balkans. In 2015 around 1 million applicants requested EU safe haven, twice the number from the previous year, with the fastest buildup in Germany, Hungary and Sweden. Syrians accounted for one-quarter, and Balkan citizens from Kosovo and elsewhere for 15 percent, with the latter mostly rejected as economic migrants. Other countries with high acceptance rates were Afghanistan, Iraq and Eritrea, with arrivals often first landing in Turkey, Greece and Italy. Lebanon and Jordan have dozens of times more inflows per population than Europe, which last experienced such waves after the end of Communism and implosion of Yugoslavia in the 1990s. The original system of free entry and shared resettlement under the Dublin and Schengen approaches has been replaced by unilateral admission restrictions and border checks, including in Austria and Scandinavia joining early refusing members in Central Europe. With the process breakdown governments have agreed to build and underwrite temporary “hot spots” in gateway locations, and to send EUR 3 billion in aid to Turkey for frontline management, after it has spent over double that amount hosting Syrian escapees the past five years.

The IMF estimates an increased average budget burden of 0. 1 percent of GDP this year, including in Croatia and Serbia, but the Stability and Growth Pact allows debt waivers for “unusual events outside state control. ” Brussels is offering EUR 9 billion in central support for the Frontex border patrol and other purposes, and simulations show that output could be lifted by the same degree in individual countries as the additional expense. The medium-term impact in leading destinations Austria, Germany and Sweden could be a 1 percent gain by end-decade with good employment absorption, which is usually slow due to language, skills and gender disparities, according to the report. German immigrant data reveal double the level of joblessness and lower wages than natives, and the waves prior to 2015 with an average high school education. By contrast, 20 percent of recent Syrian arrivals went to college, and other policies on minimum salary and hiring flexibility could facilitate placement. Sweden runs a custom “introduction program” to match background and interests, and Austria provides a range of specialized apprenticeship and training. Start-up business loans should be considered, as with the International Rescue Committee’s expanding micro-finance push, the Fund suggests.

Banking and housing will come under pressure, and may need more innovation for affordability. Building codes can be modified for emergency construction, and financial literacy should be an orientation component. In the EU immigrants are as likely to have checking accounts as other citizens, but overdrafts are more common. Almost one-fifth of micro-credit went to non-native borrowers in Europe as of the latest 2013 statistics, but success relies on a gamut of complementary services from business planning to legal advice. In any event existing worker displacement should be “small and short-lived” even if current refugees’ net fiscal contribution is “difficult to predict” along with the survival strategies of the Assad regime, the review concludes.

Regional Rivals’ Flagrant Fleeting Flip
2016 January 20 by admin

Posted in: General Emerging Markets
Despite shared global interest rate, geopolitical and deleveraging risks financial market role reversals in early January could set the regional tone, with Europe in the forefront after Poland’s surprise S&P one-notch sovereign downgrade with negative outlook battering stocks and bonds as Hungary’s outperformance continues with its likely return to prime status this year. The Law and Justice Party after taking power in parliamentary elections called the decision “dishonest” as its political and economic intervention platform has come under fire from foreign investors and the European Commission. It plans a special bank transactions tax and compulsory Swiss franc-zloty mortgage conversion which could cause heavy system losses at the same time additional divestiture of state ownership stakes is on hold. Consumption as the main GDP driver is likewise in the crosshairs with new levies for supermarkets to help fund higher pension and wage promises while keeping within the constitutional public debt limit. Government company chief executives have been replaced with party loyalists, and a bid to extend control with its absolute majority over the media and courts has prompted Brussels criticism and investigation that Warsaw dismisses as “misunderstanding. ” Fitch Ratings has not changed its stance but admonished the administration’s “confrontational policies” as the contingency credit line with the IMF in place since 2008, granted on pre-qualified fiscal, monetary and structural reform excellence is due for review. Prime Minister Szydlo is considered a figurehead and the Deputy Finance Minister is often paraded out as a former banker to lend credibility but has instead alienated former colleagues.

In contrast Hungary will come in under the EU’s 3 percent of GDP budget deficit sanctions trigger, and major privatizations are foreseen to revive the stock exchange recently re-acquired from Austria. Elsewhere in Europe Turkey is getting another look after the lira and equities were down one-quarter and one-third respectively in 2015. The Syrian and Kurdish militant wars remain a deterrent, but the Prime Minister stresses an economic reform agenda after the ruling AKP reclaimed its election dominance. The fiscal and current account deficits slimmed and growth this year is projected above 4 percent for a regional standout. In exchange for hosting refugees, Ankara will receive EU aid and easier visa-free travel, and Cyprus reunification may be in the cards after four decades, with heads meeting from both sides and Athens also pushing reconciliation. Despite its friendlier approach to the dispute, Greece has still not won over investors after its worst MSCI 60 percent stock market decline. The troika still has to approve detailed pension cuts and bank recapitalization programs under enduring exchange controls, as Syriza tries to maintain two-seat legislative sway.

In Asia, Indonesia and Thailand may be gaining favor with infrastructure stimulus and cabinet reshuffling, although the latter’s military has indefinitely delayed its departure pending another constitutional rewrite. The latest terror attack against coffee shop civilians in Jakarta prompted a tough response from President Jokowi in comparison with previous reticence. In Latin America Argentina is a sudden darling after President Macri floated the peso, slashed farm export taxes, and reopened negotiations with holdout bond funds and retail associations at home and in Europe. The Finance Ministry moved separately to restart cross-border commercial credit lines with the tentative thaw.





Emerging Market Risks Unrelenting Until End-Decade Rebound
2016 January 20 by admin

Posted in: General Emerging Markets


After more than 25 years providing independent analytical research and advisory services to public and private sector clients on developed and emerging economies through numerous economic and financial market crises, Kleiman International is for the first time publicly offering its views for 2016 in this summary previously reserved for clients. This brief analysis will offer the firm’s review of last year and opinions of the risks and vulnerabilities, and potential opportunities, facing emerging economies’ currencies and financial markets incorporating the broader global picture.

Last year’s dismal emerging market stock performance is expected to be repeated after the MSCI Emerging Market and Frontier stock indices fell more than 15 percent – with gains recorded in only Hungary in the former and Estonia, Lebanon and Jamaica in the latter – although externally issued sovereign bonds, as measured by JP Morgan’s EMBI measure, ended up 2 percent on double-digit advances by Ukraine, Argentina, Venezuela, and Russia. Similarly, currency depreciation – which resulted in declines of more than 20 percent against the US dollar in Brazil, South Africa, Colombia, Turkey and Russia in the major emerging markets – is expected to continue on the China slowdown, low commodity prices, and depressed global trade.

The US Federal Reserve is expected to tighten gradually while Europe, Japan, and China loosen monetary policy to spur growth and inflation. Geo-political risks – and the accompanying economic fallout – will remain elevated while commodity prices continue soft and global trade continues to deteriorate. Rising concern over excessive leverage in emerging economies – largely private as opposed to sovereign, which triggered past crises – will continue to weigh on investor sentiment even if battered currencies begin to recover against the US dollar as an estimated 90 percent of debt is domestic.

In the core emerging markets, vulnerabilities are evident across the universe but differ by country and risk factor. Over the past two decades, a US Federal Reserve rate hike has immediately resulted in virtually a wholesale flight to safety. We would argue that this time is different as anticipation of tightening grew steadily beginning with the 2013 “taper tantrum” which sent investors fleeing risky assets. Throughout the same period many of the largest core markets have slowed sharply, triggered either by global issues like commodity price falls, the slowdown in China, and geo-politics, or by domestic economic and/or political issues. The BRICS economies will remain particularly in the spotlight in 2016, as evidenced by the China-induced volatility in the first week of trading this year.

The economic slowdown and currency uncertainty in China, despite inclusion of the yuan in the IMF’s SDR, is expected to continue to deepen in 2016 as investors and the State Council try to gauge the extent of the slowdown amidst economic rebalancing and soaring debt levels. The December launch of a new trade-weighted RMB exchange rate index heightened expectations for currency depreciation, with a drop of 10-15 percent against the US dollar likely by year-end. At the same time, regulatory shifts on stocks, bonds and the currency are likely to continue apace – as well as reverberations from the anti-graft campaign – which will continue to weigh on investor sentiment as predictability is a key ingredient for foreign investor decision-making. Interest rates are likely to be cut significantly to prop up the economy as fiscal spending continues to accelerate after surging nearly 26 percent on an annual basis in November. Financial market volatility and a growing number of on- and off-shore corporate bond defaults will also undermine overseas investor sentiment. Real GDP growth data will come under heightened scrutiny, particularly after the state-run media reported that several regions inflated economic indicators reported to the central government by at least 20 percent.

Elsewhere in emerging Asia, attention will focus on falling exports, slowing growth, and elevated levels of corporate and household debt. Oil-exporter Malaysia, where the ringgit lost 19 percent last year and was the worst performing currency in the region as the stock market fell by 22 percent in dollar terms on the MSCI Index[1], will remain under pressure despite evidence that the heavily indebted state investment company 1MDB is reducing its leverage from asset sales. Commodity prices will continue to weigh as the budget deficit will remain stubbornly above 3 percent of GDP despite the widely hailed launched of a goods and services tax, while political risk will similarly continue to dent investor confidence with the ongoing investigations over graft against the Prime Minister.
Next door in Indonesia, commodity prices will continue to weigh on the world’s biggest palm oil grower and thermal coal exporter after the stock exchange lost 20 percent in 2015 and the rupiah was down 10. 9 percent against the greenback. Both markets are at risk of further currency pressure due to heavy foreign holdings of local government bonds. Thailand, where the stock market lost a quarter of its value while the currency was down 8. 5 percent, is likely to outperform neighbors as a stimulus program, rural debt relief, and USD 50 billion multi-year infrastructure plan offset concern about falling trade, high household debt and the delay of constitutional reform and return of civilian rule.

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

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

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

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

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

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

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

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

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

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

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



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Stock Markets’ 2015 Universal Ugly
2016 January 12 by admin

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

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

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

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

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

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

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

Brazil’s Unimpeachable Whirlwind Witness
2016 January 4 by admin

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

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

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

Egypt’s Crashing Pound Headaches
2016 January 4 by admin

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

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

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

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

Africa’s Cratered Debt Landscape
2015 December 24 by admin

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

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

Brazil’s Unimpeachable Whirlwind Witness
2015 December 24 by admin

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

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

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

The BIS’ Callous Calming Effect
2015 December 14 by admin

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

A separate chapter examines overall non-bank dollar debt accumulation at almost $10 trillion, with one-third incurred by resident borrowers, and external bonds through affiliates not captured in the data.