No More Learning

For fragile and transitional countries, AID’s traditional competitive bidding, typically a 2-year cycle, could be waived to allow quick program and personnel deployment. The surge would come under a new operation after previous attempts like State’s Conflict and Stabilization Bureau proved inadequate. The report recommends joint AID-MCC programs since the latter’s 5-year country compacts can frame broader economic policy change, and the former could deploy its credit authority to foster private financial flows. It adds that agreements could be extended indefinitely on steady governance and inclusion improvement since few new eligible candidates appear annually. OPIC should be expanded into a full-service funding organization despite the initial Trump budget seeking abolition, with the existing range stretched to public equity investment and technical assistance, while enterprise ventures promoted elsewhere are transferred to its control. Disaster relief remains AID’s comparative advantage, although refugee humanitarian duties should be split with the State Department’s migration bureau. Food, which has to be shipped by US carriers under outdated law, should not be the Agriculture Department’s responsibility and reforms should focus on cheaper local supply and distribution not distorting traditional markets. Reporting and strategy should be streamlined and shared across a common platform, and a comprehensive review of UN and multilateral development bank contributions can weigh detailed costs and benefits for billions of dollars that may be better allocated under alternative arrangements.

The CSIS think tank convened another bipartisan task force on the subject, with the reminder that foreign aid is just 1 percent of the budget or around $40 billion, while the original enabling act is over 50 years old and over 20 government units are now involved with congress layering on hundreds of earmarks and information mandates. A main purpose is international economic partnership to create US jobs and sales, and the group warns about repeating the mid-1990s overhaul experience, with large layoffs “crippling” AID leadership and technical ranks. It notes that today’s complex challenges include forced migration, pandemics, terrorism, political dysfunction and transnational crime, as private capital flows to developing countries are five times official support. Canada will soon join the rest of the G-7 in launching its own full-fledged development finance arm, leaving the US alone with its lagging OPIC structure. Middle income recipients should graduate over time, and development bank burden sharing must be clearly defined after a 15-year period of “benign neglect. ” The number of sectors should be narrowed following the base realignment parallel at the Pentagon, and short and long-term pools should stay separate with management from a dedicated career corps of specialists not cultivated under current work force planning, according to the blueprint.

Asean’s Ambivalent Crisis Anniversary Anchors
2017 July 27 by admin

Posted in: Asia
The two-decade anniversary of the Asian financial crisis originating in Thailand and quickly spreading to Indonesia, Malaysia and elsewhere was marked quietly by regional investors and officials, as they acknowledged comeback since that grim period but were wary of new debt and capital flow risks despite healthy first half securities market results. The IMF, which extended $40 billion in rescue programs, noted the pain from broken currency pegs and widespread corporate bankruptcy and average GDP growth at roughly half the previous 7-8% pace, while commending foreign reserve accumulation and financial sector cleanup and regulatory strengthening. The episode prompted local currency bond market expansion under the auspices of the Asian Development Bank, and bilateral and multilateral swap line arrangements with the Chiang Mai Initiative. Franklin Templeton emerging market chief Mark Mobius commented about sovereign and business “harsh lessons” from untenable debt loads at the same time that the Bruegel think tank tracking these trends put ASEAN corporate leverage at 100% in terms of total liabilities to equity, over half of it short term. The Chinese ratio is more extreme at 175%, and although ASEAN’s position is “sound” the Brussels-based monitor stipulated that trade and funding shocks could reprise crisis-era qualms.

Thailand’s ruling generals also hesitated to cite the occasion as a possible reminder of democracy loss since, as its MSCI Index rose 9% through the first half. Since passage of a constitutional referendum a year ago, future election plans remain murky and the army’s self-proclaimed reputation for integrity was dented by a major human-trafficking scandal involving neighboring Myanmar’s Rohingya refugees. The new King has now assumed full control of the estimated $30 billion Crown Property portfolio, which includes stakes in blue-chip stock exchange listings Siam Cement and Siam Commercial Bank. Growth was over 3% in the first quarter on decent consumption, but public investment up 10% was the main driver. Exports rose 7% from January-May, and the central bank recently intervened to curb the baht’s 5% appreciation against the dollar to safeguard gains. The benchmark 1. 5% policy rate otherwise is on hold under a loose monetary stance with negligible inflation. The trade surplus recovered to almost $1 billion in May, but consumer confidence is still low with a 75 reading, under the positive 100 threshold, and the manufacturing PMI is barely expansionary. Poor farm prices are hitting agriculture, at one-tenth of GDP, as foreign direct investment there continues under 1% of the total with lingering restrictions.

Indonesian stocks advanced almost 15% through mid-year despite a political scandal around the parliamentary speaker, from the Golkar Party founded in President Suharto’s time and a close ally of the incumbent Joko Widodo. Growth is humming at 5%, below the President’s 7% promise, and fiscal space is limited nearing the 3% of GDP deficit cap. With rising food and energy costs, inflation is 4. 5% and the central bank has paused its easing cycle. Credit growth is only in single digits as banks turn wary of private sector debt, which is half the $330 billion external total. Former Bank of Indonesia chief Djiwandono, interviewed about the Asian financial crash, expressed resumed concern over “scary leverage. ” Foreign investors have poured $7. 5 billion into rupiah notes earning 9%, but Fitch Ratings was cautious about the doubled bad loan ratio at 3% since the 2013 “taper tantrum,” persistent 2% current account gap, and stalled reform momentum from “religious frictions. ”

In Malaysia, where the MSCI Index climbed 12%, former Prime Minister Mahathir Mohamed was back in the news not just for crisis retrospective but possible renewed candidacy for the post against under a startup political party against successor Najib Rezak, still stalked by the multi-billion dollar IMDB fund diversion under investigation on three continents. A separate commission of inquiry was established in July to review questionable central bank foreign exchange transactions in the 1980s and 1990s in a counterattack against Dr. Mahathir’s tenure. In advance of likely elections, GDP growth was 5% in the second quarter, and the 2018 budget offered new tax incentives for high-tech innovation. China pledged $80 billion in medium-term projects under the Belt and Road scheme, but household spending remains squeezed by 80% of GDP debt. Inflation was 3. 5% in June, and the central bank overnight rate stayed 3% with the currency down 7% the past year despite a recent surge, reflecting the dichotomy in ASEAN’s post-crisis 1998, 2008, and perhaps 2018 investor haven pitch.

Tunisia’s Nascent Neighborly Nod
2017 July 21 by admin

Posted in: MENA
Tunisian shares turned slightly positive on the MSCI Index at the half-year on the second anniversary of a bloody beachside tourist attack, as the IMF praised the new unity government’s “corrective action” intent in its first checkup on its 4-year $3 billion facility, and strengthened security internally and along the Libya border preempted further incidents. Officials traveled to Washington to thank the US Defense and Treasury Secretaries for support, with the message that Libyan reconstruction may also be in the frame in selected areas with civil war and ISIS presence waning. At the same time the Fund report underscored the advanced political transition despite economic lethargy and social discontent, with all coalition parties including the labor-union dominated wing pledging reform and stability to redress budget and current account deficits, state bank dysfunction and runaway youth unemployment amid high university and training qualifications. This year’s GDP growth forecast was reduced to 2. 5 percent from the original 3 percent due to fiscal and monetary tightening countering better phosphate exports and tourism. The medium-term aim is to reprise the 5 percent level existing under the previous authoritarian regime, which followed competitive policies tinged with insider corruption now under investigation and subject to asset recovery efforts. A controversial amnesty law would allow reported billions of dollars to be returned at minimum penalty and separate deals have already been negotiated with business executives close to ousted President Ben Ali allowing them to resume local activities. The legislation could be a major issue in upcoming municipal elections, which will also focus on the rural-urban and interior-coast income divide. The budget gap will again be 6 percent of GDP as wage increases in the bloated public sector overtake lower energy subsidies and a one-time 7. 5 percent corporate profit charge. Pension fund arrears continue to mount, and financial transactions have also been hit by a special tax.

Inflation should stay under 4 percent despite near 25 percent currency depreciation since the end of 2015 amid double digit current account holes. The benchmark interest rate was lifted 75 basis points to 5 percent, and the central bank reintroduced foreign exchange auctions to bolster market determination. Civil service cutbacks are in store, and new performance contracts should pare state enterprise contingent liabilities. The three big government banks have been recapitalized with fresh management but the bad loan ratio is still 15 percent and resolution procedures are outdated, according to the IMF. An inclusion strategy embraces micro-finance, credit bureaus, digital services and small business access, and bond markets are a priority with yield curve development. The revised investment code will create a one-stop shop for international projects and public-private partnerships, but commercial climate rankings are “poor” on the World Bank and World Economic Forum surveys. Official debt is to settle at 70 percent of GDP by end-decade, but “slippages” have already endangered the goal and “unsustainable” government spending and “inefficient” legal and regulatory regimes impede overall transformation. After a EUR 850 million Eurobond, Qatar loan rollover, and donor pledges external financing is in place until early 2018 when additional sovereign issuance is scheduled which may no longer carry a third part guarantee if revolutionary progress can be consolidated, the findings suggest.

The GCC’s Family Fight Fractures
2017 July 21 by admin

Posted in: MENA
Qatar shares were down 12 percent on the MSCI index in the first half with banks abandoned in particular as Bahrain, Saudi Arabia and the UAE suspended commercial and diplomatic ties with a US nod due to alleged terrorist and Iran sympathies. The Gulf neighbors issued a list of demands to reverse course, including shutdown of the Al-Jazeera TV network, as royal family members scrambled abroad to press their cases in world capitals. Kuwait, which earlier had pulled out of the joint dollar peg, offered to mediate the dispute as economic and monetary union progress remained on hold with hydrocarbon export price slippage. Sovereign bond yields rose 50 basis points on the rupture as the Al-Thani family moved to reassure the 2 million population that the wealth fund with $300 billion in assets would maintain normal trade and public services and World Cup 2022 infrastructure projects. However essential imports have come by Saudi Arabia’s land bridge and Dubai’s Jebel Ali port as Qatar Airways was banned in the region. The investment authority previously had taken over equity stakes in a half dozen major conventional and Islamic banks, which now may be sold if the crisis lingers, along with flagship real estate holdings in Europe including London’s Shard tower. The 2009 lifeline to Barclays Bank in the UK has also come under scrutiny as its top executives may have misrepresented the deal, according to fraud investigators. They may also consider local misconduct signs in the transaction, after the corruption cloud was finally lifted over the World Cup bid following years of FIFA probes which resulted in mass resignations. US Secretary of State Tillerson, with close personal connections to leaders from his Exxon-Mobil CEO tenure, has also tried to bridge the divide which may extend beyond the short term and place GCC integration in indefinite “limbo,” in the words of UAE’s foreign minister. Tiny Oman has also been put in the crossfire, with its MSCI component off almost 20 percent, as it allies with neither camp in the wake of a Fitch Ratings outlook downgrade to negative with a forecast budget deficit at 12 percent of GDP this year with recession. New taxes and energy ventures should support the “A” rating, but it will follow OPEC supply restraint as bank liquidity is squeezed, the agency noted.

Saudi Arabia in contrast was up 5 percent at mid-year after MSCI mooted a chance for core universe entry in a future review on greater non-GCC institutional investor access. Enthusiasm also accompanied the King’s formal announcement of Prince Mohamed bin Salman, architect of the 2030 reform plan and Aramco proposed IPO, as heir. He is younger generation but a conservative foreign policy advocate who has backed Qatar’s isolation and the Yemen civil war intervention against Iran-aided Houthi forces. Aramco underwriters have already been tapped and foreign listing venues could include New York, London and Hong Kong. A 5 percent chunk will be floated and the Prince estimates capitalization at $2 trillion, although experts believe valuation will turn out to be $500 billion lower if full accounts are disclosed. The frenzy will be at the opposite extreme of syndicated loans, which have fallen 65 percent to under $20 billion, a 4-year low, as external bond issuance tries to crack the traditional fold.

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Greece’s Aging Tour Act
2017 July 14 by admin

Posted in: Europe
Greek stocks were up almost 30% through mid-year as Euro area finance ministers approved the rescue program’s EUR 8. 5 billion in June for a small net infusion after official and private bondholder repayment, and committed to further debt relief to keep the IMF on board. The ECB has Fund participation as a precondition to possible government bond buying under quantitative easing, and the Washington agency and Germany remain at odds over growth and servicing calculations guiding sustainability. The 3. 5 percent primary budget surplus target is intact for the next five years, and the Tsipras government, which hailed the “landmark” agreement, must complete other moves including professional services opening for full disbursement. Economic and business sentiment readings went above 90 and the PMI entered expansion for the first time in a year on the news, as tourism revenue increased 2. 5 percent from January-May in part reflecting security scares in rivals Egypt and Turkey. The National Bank of Greece, a big exchange listing, sold more Balkan assets including its Romania subsidiary, but continues to struggle with its bad mortgage portfolio after home prices halved since the crisis. Moody’s upgraded the “C” rating with a positive outlook on output and fiscal stabilization, but cautioned about high political risk and reform delay. Cyprus’ visitor numbers have also picked up as Q1 GDP growth was a post-crisis high 3. 5 percent, with unemployment down to 12. 5 percent. A 7-year EUR 850 million Eurobond was oversubscribed at a yield 100 basis points lower than a year ago, which will partially go to early IMF repayment.

Speculation mounted about possible reunification talks breakthrough after the UN praised progress, and the Turkish side seemed to be more amenable to compromise with preoccupations at home on economic and political threats. The MSCI Index gain tied Greece on near 5 percent growth stoked by budget stimulus, in contrast with the record of basic balance over the past decade. Public debt is less than 30 percent of output, but domestic borrowing costs and reliance have jumped, as bank Treasury bond buyers are also pressed to use a government guarantee scheme for priority small business and infrastructure project loans. Worker social security obligations were postponed and agricultural subsidies hiked. President Erdogan has also warned the central bank against tightening despite 12% inflation in a bid to maintain popularity as hundreds of thousands of civil servants are purged and educated professionals flee fearing arrest. The main opposition party has turned to a group protest walk across the country as a mobilization tool, which may spur another crackdown. Heavy handed tactics by security forces also were condemned after a visit to Washington when presidential guards attacked Turkish embassy marchers. Alleged lobbying and efforts to extradite exiled spiritual leader Gulen by ousted Trump national security aide Flynn also provoked a backlash. Eurobond issuance was over $6 billion from January-May, and the lira has settled around 4 to the euro with the capital account in 1 percent of GDP surplus, but the current account gap persists around 4 percent despite export surges by global champions like white goods maker Arcelik. Errors and omissions almost equaled the financial inflow size in the balance of payments as money escape also strikes a blow.

Central Europe’s Bypassed Boorish Behavior
2017 July 14 by admin

Posted in: Europe
Central Europe stock markets, with Poland’s 32 percent gain the core universe leader, were strong through the first half as planned IPOs neutralized backlash against political heavy-handedness unsettling investors and drawing EU condemnation. GDP growth numbers at 4-5 percent were also solid, with low interest rates and inflation as the Czech central bank removed the currency peg and appreciation continued. Hungary’s climb was half Warsaw’s, although it outperforms on a one-year scorecard, as EUR 6 billion in annual public investment aid from Brussels may be in jeopardy on Prime Minister Orban’s hard-line stance against democracy activists and refugees, culminating in a recent campaign to shutter the Central European University founded by Hungarian-American civil society and immigration benefactor Soros. Czech consumption was up a modest 2 percent in Q1, as inflation also hit that target to lift the koruna cap in place long after the Swiss central bank ended its intervention. Elections are due again in October, but may come earlier after the prime minister resigned and then retracted the move over his rivalry with business magnate and Finance Minister Babis, whom he accuses of tax violations. The President has refused to take sides in the fight, but Babis stepped down to prepare to lead his party, which has a double-digit margin in opinion surveys, in the upcoming polls.

Hungary’s monetary stance remains ultra-loose, with the central bank offering direct on-lending to sustain manufacturing as the PMI peaked at over 60 in May. Big freight firm Waberer’s is set for a record listing as a private equity exit with expected EUR 500 million capitalization. Its network straddles Western Europe and Germany in particular, and the deal would be a breakthrough in small and midsize firm support promised under official bourse takeover from the Vienna Exchange in 2015. Since then five companies were delisted, and private pension fund absence after seizure has deterred foreign participation. EU human rights spats have raised flags and the latest alleged breach of open education practice, along with corruption investigations into misused subway and other project funds, may heighten the stakes as the ruling party’s membership in the European parliament may be stripped as punishment. In Poland the “illiberal” camp is likewise in full swing with court and army appointments carefully controlled by the Law and Justice Party in power. Judicial independence would be at risk with new legislation which was criticized by security watchdogs for “undermining rule of law. ” The military reshuffle in turn may endanger NATO equipment upgrade and spending commitments at a time the US administration has focused on these European ally shortfalls. Domestic demand is the main economic driver, but workers returning from London upon Brexit will dampen the outlook and add to high unemployment. Foreign buyers continue to own one-third of local debt, but the base has diversified to Asia and the Middle East and a “green bond” yield curve will be built as another innovation. However dedicated clean energy funds shunned Poland’s debut issue in view if its core coal industry, and pricing has otherwise been rich with the run-ups in JP Morgan’s benchmark domestic and external bond gauges through mid-year dirtying allocation.

Mozambique’s Mechanical Murky Water Dive
2017 July 7 by admin

Posted in: Africa
The long-awaited audit of Mozambique’s $2 billion in suspicious loans from 2013 then defaulted by New York private investigator Kroll, paid for by the Swedish Embassy upon IMF insistence before program consideration, was released by the Attorney General, which has a separate domestic criminal inquiry. One-quarter of the total could not be tracked, and the three state company borrowers,tied to the national intelligence agency, reportedly spent $700 million too much for acquired fishing vessels and security equipment. The obligations were hidden off-budget from the Fund and bilateral donors that subsequently suspended aid. The debt syndicate arrangers, Credit Suisse and Russia’s VTB Capital, came in for criticisms over high fees amounting to $200 million which they claim were overstated. The detectives noted pervasive lack of cooperation and documentation in their findings, and a Fund statement welcomed the summary despite “information gaps. ” Creditors of the lapsed “tuna bond” have yet to show their hand, as the country continues to negotiate new offshore gas exploration deals. They remain reluctant to take haircuts and may also press legal action against the underwriters for alleged deception or negligence. Kroll further discovered after reviewing business plans and feasibility studies that the Mozambique companies in question were “not fully operational” with “considerable” management dereliction and excess contractor authority. The government guarantee process was “inadequate” with conflicts of interest and admission of budget law breach. Tendering also entailed questionable due diligence, and loan agreements had unexplained fees. The companies have no revenue and product supply invoices are unclear and inconsistent, although assets could be physically located. Other state enterprises rather than the borrowings provided share capital. Credit Suisse demanded prior central bank approval and IMF disclosure, but the paper trail suggested only these conditions were “overcome. ” According to the authors company executives may not only have been in violation of debt covenants but the local commercial code without proper qualifications, accounting and project oversight.

Cameroon in the Central African Francophone zone is the latest oil exporter to turn to a Fund arrangement, as the fiscal toll left it unable to meet monetary union convergence targets. President Biya is one of the continent’s longest serving rulers, and the border with Nigeria has become embattled with the Boko Haram rebellion. Its President issued his first public declaration since May after unknown medical treatment. Bank exposure to oil companies has triggered fears of another crisis, as MSCI put the stock market on “self-standing” notice for its foreign exchange crunch implying near-term frontier index expulsion. Ghana has less than a year to go on its Fund facility as it registered a QI small primary fiscal surplus which may finally embed consolidation. The trade balance was also positive with cocoa exports up 25% in the quarter on forward sales. Gold and oil shipments and FDI rose as well and international reserves at $6. 5 billion, a five-year high, have slowed currency intervention. Inflation is still in double digits and although foreign investors are back in the local bond market as external issuance is cautious yields may again spike on likely supply curbs to ensure that austerity is no longer finessed.

Forced Displacement’s Involuntary Toll Tally
2017 July 7 by admin

Posted in: General Emerging Markets
The UN Refugee agency released its annual report on global relocation due to war and persecution, with the total rising to 65 million, one-third refugees crossing borders and the majority internally displaced within their own countries. Last year 10 million were newly uprooted, and half of refugees are children and 85 percent are in the developing world. The Syria conflict is the biggest contributor with 5. 5 million citizens fleeing, followed by Afghanistan and South Sudan respectively at 2. 5 million and 1. 5 million. Lebanon hosts the highest portion in per capita and Turkey in absolute terms, and 2 million asylum claims were filed and 190,000 refugees resettled in 2016, half in the US before the Trump administration’s proposed stricter limits. The number on the move has doubled in twenty years mainly due to Middle East and Sub-Saharan Africa unrest. After Syria’s 12 million Columbia has the most displaced with over 7. 5 million and Nigeria, Ukraine, the Democratic Republic of Congo and Yemen also range from 2-3 million. South Sudan’s exodus was particularly pronounced last year with spillover into neighboring poor countries like Uganda. The 22 million refugees include 5 million Palestinians under the UNHCR’s longstanding mandate, and they increased 1 million globally. Africa had a 15 percent jump and Turkey now has received 500,000 more Syrians than all of Europe’s 2. 3 million, and also has 15,000 exiles from Iraq, Afghanistan and Somalia. Pakistan has 1. 5 million Afghanis; Lebanon 1 million Syrians and Uganda 650,000 South Sudanese. Jordan has taken in 650,000 from Syria, almost double the influx into Germany. Kenya has the tenth biggest refugee cohort of 450,000 chiefly from Somalia. In Asia almost 500,000 Rohingya left Myanmar as of last year, with half staying in Bangladesh and 100,000 each going to Malaysia and Thailand. Low and middle-income economies disproportionately accommodate inflows, with “least developed” Cameroon, Chad, Ethiopia and Sudan among others with 5 percent of the world total. Two-thirds are in “protracted” stays of five years-plus and 4 million have been way for an average 20 years, according to the UN data.

Last September’s General Assembly summit emphasized durable solutions, including voluntary repatriation, third-country resettlement and local integration, but they have been “inadequate” and left large swathes in “precarious” position. Returnees with official assistance are less than 5 percent, and the US, Australia and the UK are now tightening entry programs while Canada continues its welcome. Legal status through naturalization extended to just 25,000 in 2016, with France, Belgium and Austria boosting designations. Labor and education are improving as “complementary pathways” but domestic competition and lack of capacity continue as long-term obstacles. Libya and the Philippines had 450,000 and 250,000 respective internal returnees despite strife, which has since worsened and is likely to reignite escape. Almost 3 million sought asylum, and while Afghan, Iraqi and Syrian applications comprised 70 percent in the US half came from Mexico and Central America including Venezuela. Italy received almost 50,000 claims from Nigeria, Gambia, Senegal and Eritrea. France, Greece, Sweden and South Africa also processed large amounts and 900,000 were approved overall with Germany alone rendering 600,000 decisions. Another 3 million people are formally “stateless” and of the 17 million refugees outside the Palestinian saga half have private shelter, and 4. 5 million are in managed or self-designed camps which may not displace anger and fear, the report suggests.

The BIS’ Layered Globalization Glee
2017 June 24 by admin

Posted in: Global Banking
The Bank for International Settlements hailed globalization’s “profoundly positive” results the past half-century in its annual report, due to the “deeply symbiotic” connection between trade and financial openness. It acknowledged inequality and instability with the process, which can be better governed and managed as an economic development strategy both domestically and globally. The proliferation of foreign assets and liabilities and currency hedging, often through banks following cross-border customers, can be divided into three increasingly complex layers moving from simple commodities sale and associated credit to direct transactions for balance sheet purposes. Around half of trade is invoiced in dollars and one-quarter in euros, and basic letters of credit are used in one-sixth of deals. As the global value chain and FDI have deepened in recent decades, more specialized products like derivatives have spread, and in the final phase since the 1980s purely financial engineering supercharged integration so that emerging market international exposure almost doubled to 180 percent of GDP. Developing economies represent half of the worldwide manufacturing chain, with China alone taking one-fifth. As with multinational companies in commerce, global banking groups dominate finance with vast country and regional networks unable to be reflected accurately in nation-based reporting and statistics. Emerging markets’ inward investment contains both debt and equity flows, with the latter implying long-term commitment and the former short-run intra-firm borrowing and speculation. Their exposure has jumped toward offshore money centers as treasuries became more sophisticated and allocations did not involve plan and equipment outlays.

Since the financial crisis a decade ago globalization has been “in check” due in part to lingering trade weakness, but conventional measures of assets and liabilities to output overstate the correction as developing market openness has continued “unabated,” the report insists. Pullback has centered on cross-border bank loans, particularly from Europe, as portfolio fixed-income and stock volume increased. “Deglobalization” is debunked by careful definitions of the prevailing data, which shows lenders in forty jurisdictions reporting a 20 percent drop in cross-border claims from 2007-13 on a balance of payment basis, which can double count and ignore local lines of the consolidated unit. Scrubbing the numbers by bank nationality, Europe’s retreat is pervasive but can be attributed largely to cyclical deleveraging needed to meet stricter BIS capital and liquidity rules. Financial linkages also transfer technology and boost inclusion by allowing low-income borrowers access to new channels, but can favor capital over traditional labor returns to create wealth disparities. In historical experience cross-border credit flows have been pro-cyclical to amplify booms and busts, and the dollar has soared in risk aversion periods as well to harm emerging market accounts. Since the 2008 crash global monetary policy has also been ultra-sensitive to US Federal Reserve moves, and in addition to building foreign reserves macro-prudential tools have been a crucial defense, and joint regulatory approaches have been forged between geographic and functional financial system blocks. Currency swap mechanisms and tax harmonization can go further, especially with long-run interest rate correlation so tight in recent years. In a sampling of 35 countries, 25 had close spillovers from Fed rate and quantitative easing decisions, and simultaneous shocks could add another layer to the future one-world story.



Cuba’s Thwarted Thaw Thickening
2017 June 24 by admin

Posted in: Latin America/Caribbean
Cuban asset prices sank as the Trump administration announced partial reversal of bilateral travel and commercial openings and harshly criticized authoritarian human rights practices overlooked in other regions. The tougher line fulfills a presidential campaign pledge to Miami’s exile community cheering the changes, while business lobbies like the US Chamber of Commerce were upset that global competitors would have easier access, as their countries long ago approved individual tourism and joint ventures under military control that will now be banned after the Treasury Department issues guidelines. Airlines had reduced or severed routes before the decision, as visitor infrastructure from internet availability to hotel occupancy frustrated demand with renewed diplomatic relations two years ago. However big cruise lines with expansion plans through end-decade may preserve their strategy as they cater to groups with accommodations in place, but disappointments also mounted with the lack of credit card acceptance, dual exchange rate, and poor organized visit experience for foreigners. Starwood was the only US operator to offer a resort as an alternative to state-run hotels, as the Brookings Institute projection of $10 billion in hospitality earnings by 2030, twice current imports, appeared remote without underlying tax and administrative shifts as well promoting more private sector investment. Nearby Haiti, with the hemisphere’s lowest per capita income, has been considered a more promising destination, and new President Moise will encourage agricultural and industry hubs with reliable electricity supply around northern beach locations in his economic strategy under an IMF staff-monitored program.

In the Dominican Republic in contrast tourism revenue was up 10 percent last year to over $6. 5 billion, almost one-tenth of output, with 2017 set to deliver another record. European visitors now account for one-quarter of the total, with North Americans still dominant at two-thirds.
Remittances in turn, mainly from the US, swelled near 15 percent as Q1 economic growth continued at a 5 percent clip as the regional leader. A primary budget surplus has helped halve the deficit to 2 percent of GDP, and the current account gap is the same with higher gold exports and slashed oil imports, with the difference covered by mining and hotel FDI. Costa Rica is close with 4 percent growth heading into the 2018 election season, with inflation within the 3 percent target range. Fiscal reform has stumbled on political opposition with public debt hitting 60 percent of GDP, with the external portion rising faster on international bond issuance. The 10 percent trade deficit likewise persists, and the central bank has warned capital goods demand may not translate quickly into productive capacity. El Salvador is caught in a low growth twin deficit trap with a $600 million global bond in February used to repay local Treasury bills, as pension fund obligations have not been met amid government infighting. Panama alone has maintained its investment grade as Chinese diplomatic recognition was shifted from Taiwan to Beijing in advance of its president’s White House trip. With expansion Canal toll earnings jumped 20 percent in the first quarter, and re-exports through the Colon Free zone have also picked up to support 5 percent growth. A fiscal responsibility law has enabled sovereign wealth fund transfer, and the Panama papers tax evasion saga has faded although reputation isolation lingers.





Islamic Finance’s Africa Affinity Sweepstakes
2017 June 18 by admin

Posted in: Africa
Malaysia’s Islamic Finance Center regular bulletin surveyed the sector’s “centerpiece” status in a half dozen African countries, with 50 banks including major ones in Egypt, Nigeria, Kenya and South Africa providing sharia-compliant products through dedicated windows. Sukuk bonds in turn have spread to Senegal, Mauritius, Gambia and Morocco with the African Finance Corporation recently issuing a $150 million pilot. Globally the industry should have $6 trillion in assets by end-decade, and Kuala Lumpur’s example, with 75 percent of corporate fixed income in sukuk form, can be replicated elsewhere. The worldwide Islamic bond total last year was $350 billion, almost a 10 percent annual increase. The report argues that the style fits a “responsible investment” strategy with over $20 trillion in commitments and that the regulatory and liquidity management pieces are now in place with twenty core standards and official backstop facilities. African growth is partially due to Asian and Middle East funds seeking additional outlets and to its natural resource and demographic base creating demand for credit and savings tools. It is also a means to financial inclusion with the vast unbanked population, with family and friends relied on ten times more than formal sources for small-scale loans across eight representative countries including Niger, Uganda and Zambia. Micro-finance could be a catalyst for business such as halal food export and the Islamic Development Bank and Sudan have concentrated efforts there. Regional infrastructure needs are close to $100 billion/year and long-term Islamic bonds should meet diversification goals as short term government activity picks up in Gambia, Cote d’Ivoire and Senegal. “ Green” clean energy projects are proliferating across the continent to relieve shortages where these techniques could be adopted at the outset, aided by technical assistance from official lenders as well as consulting and training arms attached to more advanced Islamic hubs.

Egypt’s previous push was associated with Muslim Brotherhood rule, but since President Al-Sisi came to power it has been tied to local and external bond market normalization in the context of IMF program return. Foreign investors have acquired $1 billion in domestic instruments after shunning them entirely since the Arab Spring. The first Fund mission praised the 9 percent of GDP budget deficit and 4% growth for the first quarter, although inflation spurted to 30 percent after currency and subsidy swings. The central bank hiked the policy rate 200 basis points to over 17 percent to further fatten local yields although taxation could change. Nigeria has also tightened monetary policy through open market operations and foreign exchange sales as officials try to ease currency controls in the belief that economic shock has passed with oil price recovery and non-oil sector stimulus. Spending is due to rise 10 percent in real terms in the latest budget as the government looks to foreign military and diplomatic support to fight Boko Haram and famine in the north. The president is still on extended medical leave with an undisclosed illness and the vice president is by all accounts in charge of the reform and stabilization agenda to include a new petroleum industry bill debated for years without passage. A diaspora external bond is in the pipeline with a sukuk version likely as the family expands.

Venezuela’s Crass Credit Craving
2017 June 18 by admin

Posted in: Latin America/Caribbean
Venezuelan bonds as top EMBI performers came under pressure for boycott or index removal, after leading houses were reported to have scooped up issues held by the central bank and other captive buyers at a steep discount through small specialist brokers. Goldman Sachs bought a $3 billion chunk at one-third the price through a London intermediary, and Nomura and Morgan Stanley were also involved in deals. Opposition parties in Caracas condemned the move and expatriate demonstrations were organized in Miami and Washington as a former Planning Minister, head of Harvard’s International Development Institute, referring to widespread staple food shortages, dubbed the instruments “hunger bonds. ” He called for benchmark index removal as MSCI applied long ago for equities given pervasive exchange controls. Although international reserves are not formally divulged they are estimated in gross terms at $10 billion, roughly equivalent to import needs with scant cushion for debt-servicing. PDVSA has already executed a maturity swap which won bare acceptance with local investor control, and its future was further thrown into question with its chief executive due to depart. A President Maduro loyalist is set to fill the slot, who was previously in charge at US unit Citgo, which has pledged collateral both to bondholders and Russian partner Rosneft in case of default. The Treasury Department increased scrutiny of the relationship as the Trump administration debates sanctions against the regime after the President tweeted about a meeting with the spouse of jailed opposition head Lopez. Military support at home may be wavering as security forces demur at cracking down on street protesters, as Maduro’s bid for a hand-picked national assembly to rewrite the constitution and mollify popular outcry has met with sweeping criticism following the Organization for American States’ anti-democracy condemnation. The Chinese meanwhile are bracing for further losses on their $50 billion bilateral loans with unknown asset claims that could place them in direct conflict with other creditors.

Previous high-flyer Brazil has also lost favor, as MSCI equity gains fell to 3 percent through May, with the Electoral Court to determine whether President Temer received illegal campaign contributions after release of a payoff tape he claimed was “doctored. ” Core PMDB party backing may no longer be assured as the stage is set for another potential impeachment. He promises to continue pressing labor and fiscal reform agendas, but major public pension overhaul in particular could be in danger with the budget deficit heading toward 10 percent of GDP despite renewed growth. The Temer recording allegedly came from one of the founding brothers of global meat supplier JBS, which faces bond and stock holder lawsuits after admitting to bribery and accepting a $3 billion penalty. Prosecutors got wind of wider misconduct after investigating inspector kickbacks for tainted products. Beef rival Argentina in contrast paced frontier markets with a 45 percent jump on possible track toward an MSCI upgrade in advance of primary elections before the October parliamentary poll. President Macri and his party intend to underscore economic success with the recession over and fiscal targets mostly honored with a one-time amnesty as $30 billion in capital has poured into one-month central bank bonds with yields over 20 percent. A new internationally-compliant consumer inflation gauge will be operational in July with likely IMF endorsement as the current administration craves its approval after a decade of resistance.

The World Bank’s Economic Prospect Pratfalls
2017 June 10 by admin

Posted in: IFIs
The World Bank’s June Global Economic Prospects analysis predicted 4 percent emerging market growth this year after 2016’s 3. 5 percent “stagnation,” on broad commodity export and domestic demand rebound, but warned of longer-term structural productivity and trade drags for an overall “soft” recovery. Fiscal sustainability is often an issue, while currencies have strengthened with inflation in retreat. Household balance sheets are stretched in big natural resource countries like Brazil, Russia and Kazakhstan, and energy lags metal and farm sales performance. Sub-Sahara Africa has floundered with 2. 5 percent growth forecast on additional political, security and weather challenges. In Francophone West Africa infrastructure has been the main driver, and Senegal re-tapped the Eurobond market in May. Current account deficits remain high in Rwanda and Uganda as they also struggle with refugee inflows. Exchange rates have collapsed in the Democratic Republic of Congo as President Kabila clings to power despite promised elections, and in Mozambique with external debt default following an inflation spike above 20 percent in the first quarter. While China and India slow other major developing economies including Mexico and Turkey will pick up the slack, but “headwinds” linger against further momentum ranging from lack of value chain integration to governance and institutional weakness. By region Europe-Central Asia and MENA will grow 2 percent, and Latin America/Caribbean just 1 percent this year, with the latter dampened by US policy fallout from the new administration’s pledged import and immigration curbs. Budget stimulus in industrial nations should be a net benefit, but “downside” protectionist and geopolitical risks will outweigh it, according to the Bank. The Middle East is at the perennial center of conflict worries, but North Korea is now in the mix and food and water scarcity cut across wide swathes of Africa. Tighter and more volatile global finance could loom with monetary policy changes not just in the North America, Europe and Japan but in China as well with the current deleveraging push with shadow banking’s squeeze. Dollar appreciation could aggravate corporate foreign currency borrowing as domestic credit backstops are not as readily available, according to the IIF’s latest lending condition survey with the still below 50 index. Oil prices could again slide with shale gas competition and non-observance of OPEC pacts. The earlier output boom from capital accumulation has not been followed by innovation and technology strides, and demographic pressures have also started to limit potential, the review cautions.

China is singled out for reform urgency with progress in state enterprise, tax, local government debt, and securities market consolidation amid lingering corporate and financial vulnerabilities. Private sector discipline and hard borrowing constraints could go further, and land and urban migration shifts can boost efficiency and employment. Emerging economies generally need increased banking system capital and liquidity, and public debt maturities should be extended and sovereign stabilization funds replenished. Labor and education overhaul and higher fixed capital formation with better property rights should be priorities and bilateral and regional commercial deepening in the absence of global agreements, such as the EU’s recent partnerships with CIS and Central American counterparts may be the future model. These accords can slash poverty but require supporting competition and capital market rules for more favorable prospects, the Bank insists.





The Arab Spring’s Seasonal Exam Markdown
2017 June 10 by admin

Posted in: MENA
The IMF completed reviews on the second post-Arab Spring round of programs with Jordan, Tunisia and Morocco, as Egypt awaited a turn after signing its agreement six months ago with stock markets flat to negative reflecting the lackluster reports. Jordan’s economic plight remained “challenging” with 2 percent growth, 4 percent inflation and over 15 percent decade-high unemployment. The fiscal deficit fell to 4 percent of GDP last year, with state utility company losses down, but public debt rose to 95 percent and the current account gap swelled above 9 percent. Geopolitical and security tensions still “impinge” on the medium-term investment outlook, despite additional donor support for refugee hosting, now able to be channeled through a World Bank-led $1 billion concessional platform. The Fund urged further moves against tax exemption and evasion and toward public-private partnerships to reduce budget costs and strengthen infrastructure efficiency. The central bank has hiked rates with foreign reserves slipping below target, as work continues on deposit protection, insurance, bankruptcy and other rules to bolster the business climate. Tunisia also was scolded for its runaway government wage bill elevating debt/GDP to 65 percent as growth doubles to a meager 2. 5 percent, “too low” to attack youth joblessness and interior region poverty. The 5-year development plan aims to restore stability and tackle structural barriers through corruption and state bank and enterprise cleanups. Exchange rate flexibility and pension overhaul are on the agenda, and the country could benefit from the G-20 Compact for Africa initiative under outgoing host Germany. At home protests have erupted over proposed “economic reconciliation” legislation that would grant amnesty to illegal fund holders in return for declaring and investing the proceeds, as a “second revolution” has sparked occupation of key mining sites triggering military protection. The new US-trained Finance Minister has yet to win additional backing from Washington, as preparations for the joint commercial summit inaugurated last year stay on hold under the Trump administration.

For Morocco’s $3. 5 billion arrangement risks are to the “downside” despite an expected growth rebound to 4 percent with unfinished fiscal and banking sector consolidation. Inflation is in the 1-2 percent range, and corporate and household deleveraging cut credit expansion to 5 percent, as the bad loan ratio neared double digits. Concentration with leading banks chasing the same state company borrowers and cross-border exposure throughout Sub-Sahara networks are major concerns, as the construction industry also heads into a weak period. The current account deficit should be 2 percent of GDP this year with good phosphate exports and tourism and remittance inflows. After preliminary fuel subsidy rollback, budget efforts have stalled and the Justice and Development party after securing an extended mandate in October elections intends to pursue decentralization, civil service salary caps, and better public enterprise governance. Parliament is set to approve provisions for bank emergency liquidity assistance as formal supervisory understandings are forged in the respective Francophone zones with a Moroccan presence. The currency peg is gradually shifting to a fluctuation band, and “e-regulation” is at the center of a campaign to lift the number 70 ranking in the World Bank’s Doing Business publication. Small firm credit access is a priority, and new collateral procedures are designed to unblock traditional financial establishment hesitation, according to the latest Article IV survey.

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Private Equity’s Public Preference Probe
2017 June 3 by admin

Posted in: Fund Flows
The latest EMPEA trade association annual survey of over one hundred private equity institutional investors with $500 billion in dedicated global assets averaging one-fifth in emerging markets offered mixed sentiment, as dollar levels are due to rise while allocation size in the overall portfolio shrinks. While developed market exposure continues to rise in contrast, bigger managers with $10 billion or with a decade or more experience are more likely to increase the relative share. Private pension funds will forge fewer general partner (GP) relationships while development lenders plan to extend them with at least five new ones, as both groups stress operating savvy rather than buyout approach as their main selection factor. Co-investing and deal by deal structures are important and local currency returns are no longer the decisive benchmark in light of recent volatility implying resort to hedging strategies. India is the number one preferred destination and attracted $8. 5 billion the past two years, Southeast Asia is in second and Latin America ex-Brazil took third as almost 20 transactions were completed in Argentina after a long drought. Sub-Sahara Africa beat out China, which takes one-quarter of capital deployed, and Russia and Turkey were at the bottom of the heap. Brazil’s standing rose but 15% of respondents will cut or end involvement there with continued political upheaval despite economic stabilization and growth return. By industry consumer goods and healthcare were the runaway favorites, with the former attracting $25 billion in 2015-16. Although half of investors complained about lack of exit and fund distribution, only 15% are considering secondary sales for cash and liquidity as they await efficiency and transparency improvements. Currency risk topped the list of macro concerns after the dollar’s recent surge erased local unit gains, and GP team stability was the chief operational one, especially with regular talent poaching and spinoffs from original vehicles reshuffling personnel. While 70% of limited partners polled thought their portfolio performance met expectations, only a minority still believe the previous 15% desired annual return is in reach. They assume developed markets will continue to lag and tap Asian funds as the top prospects, while Europe/MENA and Russia-Turkey offerings are not likely to gain 10%.

Sponsors have looked to Gulf sovereign wealth pools for anchor money, but with Saudi Arabia’s $20 billion commitment to a Blackstone infrastructure fund announced during President Trump’s trip there for an Arab summit, PE attention has turned to possible local deals that could be targeted in the mandate. The stock exchange was down through April on the MSCI index, but public capital market development is a core component of the 2030 plan’s modernization push, with equities to be further opened to foreign investors who currently account for 5 percent of activity. The June index review may position the bourse for an upgrade from frontier status, amid preparations for an historic IPO by oil and non-oil behemoth Aramco awaiting sensitive balance sheet and government relationship disclosures that may not satisfy global asset manager demands. They are otherwise dubious of reform intentions to stoke 1 percent GDP growth, expand private sector share, and restrain the budget deficit after civil servant allowance reinstatement and a new housing and debt restructuring stimulus package estimated at tens of billions of dollars over the near term without a convincing exit strategy.



Contingent Sovereign Debt’s Emergency Appeal
2017 June 3 by admin

Posted in: General Emerging Markets
After months of public and private sector consultations the IMF completed a policy paper at the request of the G-20 on promoting use of state contingent debt instruments (SCDIs) adjusted to continuous economic indicators like GDP or singular events such as natural disasters. They are recognized for countercyclical and risk-sharing features, and recent development institution focus has been on commodity hedging for low-income countries. Recently in Argentina’s and Ukraine’s restructurings growth-linked warrants were offered, but the concept has yet to gain widespread acceptance even in current global low-yield conditions inviting alternatives. As an automatic stabilizer they “preserve space” in bad times , but other tools are available to serve this purpose including foreign reserve accumulation, fiscal rules, commercial insurance, and central bank swap lines. However these backstops all have downsides and are not as accessible as well-designed long-term SCDIs in principle, which also increase securities diversification and the global financial system “safety net,” according to the Fund. Previous simulations show that introduction of GDP-tied bonds can raise the national debt limit before crisis by dozens of points as a fraction of output. The natural investor base would not be commercial banks or other mark-to-market buyers, but so called real money participants that can balance country welfare with asset returns. They nonetheless demand high novelty yields to compensate for liquidity and performance doubts, which would be magnified with data frequency and reporting gaps. For troubled countries the advance cost could spike, and until a track record develops moral hazard could argue that officials will not be as motivated to tackle macro and structural economic weakness. For issuers the operation must be the responsibility of independent debt managers to avoid political considerations and short-term time horizons, and to prepare in the context of asset class trends and sentiment swings. These combined factors argue for gradual testing within strictly-defined gain and loss boundaries, with ratings agencies brought in at an early stage, the study believes.

Official lenders like France’s development agency already provide counter-cyclical facilities to poor countries, and both advanced and emerging economies have adopted inflation-adjusted obligations and contingency features have entered sovereign debt rescheduling since the 1990s Brady Plan. Value recovery rights were in a dozen transactions, with half in detachable form, but the experience has often been indexation lags and undue complexity impeding further adaptation. Nonetheless investors surveyed were open to fresh pilots, on the assumption that pricing may be up to 50 basis points over conventional offerings at the outset. Legal and regulatory treatment should be equal to other instruments, and standard contracts and benchmark issues are preferred, with jurisdiction choices London and New York. Commodity exporters, small states, and emerging markets with shallow local bond activity are potential priority initial borrowers. Pension funds controlling $40 trillion are natural takers but may be confined to hard currency investment-grade exposure. The Islamic finance sector, currently with over $150 billion in sovereign and quasi-sovereign sukuks outstanding, would also be a likely target along with insurers and reinsurers. The document proposes three design versions, one with an automatic maturity extension trigger upon adverse statistics or events. It suggests that official creditors could add guarantees or otherwise work to galvanize multiple attempts through balance sheet and technical support, but concludes urgency is lacking.

Institutional Investors’ Sweeping Sustainability Suspicions
2017 May 26 by admin

Posted in: General Emerging Markets
Ahead of consecutive UN conferences on Financing for Development and the Sustainable Development Goals (SDG) a blue-ribbon panel of investment managers and international lending agency officials released a long-term action plan to mobilize global banking and capital markets participants around environment, social and governance (ESG) returns. Infrastructure alone will need $2. 5 trillion over the next dozen years for low-carbon energy and education-health purposes, and current financial assets at $300 trillion and increasing 5 percent annually are an untapped pool ready to look elsewhere with the large negative-yield industrial country sovereign debt category. However a wholesale commercial, regulatory, technology and long-term “reorientation” is needed for outcomes that will only be clear over decades , according to the study under the auspices of the Business Commission on Sustainable Development. New international standards like Basel III do not incorporate SDG criteria, even if the UN Environment Program and related efforts try to transmit practices and principles. The report recommends that banks, rating agencies, stock exchange listed companies and institutional investors with $100 trillion under management apply yardsticks to be created by global accounting and rulemaking bodies. Central banks in Bangladesh, Brazil, China and Indonesia already impose requirements around “green” projects so that lenders duly disclose and monitor benefits and risks. On reporting, following a series of initiatives since the 1990s, over 90 percent of the word’s 250 leading corporations detail ESG performance. Almost 1500 fund houses have signed the UN responsible investment code, but the lack of common universal metrics remains and prevents company comparisons, with 80 percent of managers expressing discontent in a Price Waterhouse survey. Regardless of the gap thousands of empirical studies show a positive correlation between compliance and profitability. Small and midsize enterprises, which have not participated due to cost and information disadvantages, could be specifically targeted in future outreach and standard-setting.

Infrastructure has a $2-3 trillion yearly hole through the SDGs 2030 deadline, two-thirds in emerging and frontier economies, in sectors including energy, transport, telecoms, water and sanitation. The goal is to limit global warming to a two degree temperature rise, as the urban population will roughly double by midcentury to 6. 5 billion. Public financing falls short even in the US and Europe, where it is under 2 percent of GDP, one-third the rate to meet developing world demand. The eight major development banks in turn provide just $40 billion annually and they could leverage up to $1 trillion without jeopardizing credit ratings. In seventy five low income countries, mainly in Africa private investment has been only $75 billion the past five years. Insurers are also missing as asset and risk managers for climate change, following a pattern of minimal natural disaster coverage that came to $100 billion in the latest estimate. Regional initiatives like China’s $1 trillion One Belt One Road are in a startup phase and the two big policy banks, each with over $300 billion in assets, charged with credit support are struggling with previous portfolio cleanup in that geographic nexus and elsewhere, particularly Latin America. Private pension fund expansion must go further and sovereign wealth pools should increase infrastructure project exposure with governments acting as the ultimate market maker for sustaining long-term trading products, the group suggests.

Africa’s Multiple Motor Misfires
2017 May 26 by admin

Posted in: Africa
Sub-Sahara African MSCI stock market performance was lackluster through April as the IMF released a new economic outlook underscoring the urgency of “growth engine restart. ” Last year’s 1. 5 percent rate was the worst in two decades, with two-thirds of countries representing 85 percent of GDP slowing. The 2017 prediction is for 2. 5 percent, mainly due to commodity and drought recovery in Angola, Nigeria and South Africa. The terms of trade shock will linger for members of the Central African CFA Franc zone, as well as Ghana and Zambia both turning to the Fund for rescues. Non-resource dependent Cote d’Ivoire, Kenya and Senegal have managed high 5 percent-plus range growth, but budget deficits and public debt have run up with mounting arrears and bank bad loan ratios. Fiscal consolidation is overdue in Francophone pegged currency areas, and even where the exchange rate can act as safety valve controls hamper effectiveness. External debt costs have spiked for these frontier markets with postponed access, with the average EMBI spread near 500 basis points in March. The budget gap was 4. 5 percent of output in 2016 with big payment backlogs in Gabon, Cameroon, and Mozambique, now in a second round of commercial bond rescheduling. The parallel market premium reached records in Angola and Nigeria with their official restrictions and Ethiopia also imposed import permit rules. Regional inflation is over 5 percent, and benchmark rates are often negative in real terms and central bank refinancing facilities can offset headline tightening. Current account deficits at 4 percent of GDP are double the pre-commodity price correction level, and median government debt is over 50 percent retracing the relief from last decade’s Heavily Indebted Poor Country program. Dollar appreciation against the euro has aggravated profiles and debt service-revenue indicators for oil exporters are at almost 60 percent from previous single digits.

Bank private sector credit is down, and prudential policies like Kenya’s 400 basis point loan rate cap and the absence of consumer and corporate registries and foreclosure procedures worsen the crunch. Cross-border pan-African networks, with half of deposits in 15 countries, have a larger presence than formerly dominant European banks but pose contagion risk as home and host country regulators try to forge common reporting and oversight approaches. Natural disasters are a final blow, with widespread drought and crop infestations and famine again spreading in the Sahel region. Tax revenue mobilization should be a stabilization priority, and financial sector and business climate development are key items on the unfinished structural reform agenda. In an Article IV report for Francophone West African Monetary Union members at the same time, the Fund lauded over 6 percent growth but criticized budget shortfalls toward that number and a 40 percent public credit jump. Reserves dipped below four months imports and the security situation remained precarious with terror attack and civil unrest throughout the zone. Private participation in infrastructure and better debt management would relieve pressure, and the central bank should strengthen the interbank and securities markets for improved monetary policy. Basel II and III standards are being phased in, and only half of banks meet the current capital adequacy minimum and deposit insurance and resolution regimes are still absent with the supervisory engine idling, according to the review.

Global Reserves’ Restocked Shelf Space
2017 May 21 by admin

Posted in: General Emerging Markets
Global foreign exchange reserves, after slumping $1 trillion from mid-2014 through the end of last year mainly due to dollar fluctuations, have stabilized in recent months with restored emerging market capital inflows, according to IMF and central bank figures. The global total is now almost $11 trillion and $8. 5 trillion for developing economies after a double-digit annual fall from China and Gulf country drawdowns in particular. Fund tracking data shows $50 billion in foreign investor debt and equity allocation in the first quarter, with leaps in IIF monthly high-frequency numbers. Currency manipulation through deliberate depreciation is no longer the case, although many countries have excess reserves as defined by international yardsticks of four months import and short-term debt coverage, with Hungary and Turkey exceptions with shortfalls on the respective measures. The emerging market 15 percent savings rate now tops the developed nation one, and the spurt outstrips the reserve accumulation pace. The US and UK on the flip side run the highest current account deficits as a portion of world output, although the dollar accounts for two-thirds of foreign exchange holdings, with the euro a distant second at 20 percent, and the RMB only 1 percent. In fixed income both external sovereign and corporate issuance at $75 billion and $170 billion through April are at records. In the former half the supply has been from the Middle East, with Argentina also contributing $7. 5 billion. These new entrants have spurred the asset class, along with a $100 billion annual refinancing hump toward end-decade. Big houses like JP Morgan predict $50 billion in retail and institutional inflows this year, and 5 percent cash positions built up during the initial Trump confrontation scare can help accommodate heavy hard currency-denominated pipelines.

The CEMBI spread at 250 basis points over US Treasuries is at an unprecedented low with a 4 percent index return so far, and projected high-yield defaults have halved to 2 percent with commodity price recovery. Final issuance in 2017 should approach $400 billion, with one-quarter from Asia, almost all China. One third of advanced economy bonds still carry negative yields, and Latin America has been the best performing region, as Brazil and Russia bounced off bottoms. The difference between speculative and investment-grade paper has narrowed to 300 basis points and scarcer euro-denominated have returned more than dollar bonds through April. Commodities remain mixed, and dollar strength has faded, but the main risk is with unhedged domestic-oriented consumer and utility names. Daily trading volume by the US TRACE system is $3. 5 billion, half in quasi-sovereigns. Dedicated assets under management are $80 billion, and so-called crossover investor interest has increased although US high-yield exposure is still below 3 percent. Recovery values were dismal last year at 35 cents, and 20 instruments in Brazil and Venezuela currently trade at 50 percent of par or under in deep distress. Net debt and ratings downgrade ratios have improved with better earnings estimates. Of the $2 trillion tracked half is quasi-sovereign with Asia and the Gulf having majorities in the category, and leverage indicators have stabilized although state support is the credit bulwark increasingly offset by policy wobbles, analysts caution.

The Balkans’ Suppressed Agrokor Agony
2017 May 21 by admin

Posted in: Europe
Croatia, Slovenia and Serbia held on to single-digit MSCI Frontier index gains through April following passage of a law to facilitate orderly restructuring at food and retail chain Agrokor, with hundreds of thousands of employees and suppliers across ex-Yugoslavia after it was unable to get emergency commercial loans. The Zagreb government under terms of EU membership cannot guarantee the private conglomerate’s liabilities despite its systemic importance, and such a move would jeopardize fiscal deficit progress at less than 1 percent of GDP last year to lift potential Brussels sanctions. Domestic consumption and investment will suffer pending resolution, and could jeopardize the 3 percent growth target likely with good tourism numbers. Banks in the sub-region face a blow but may be able to absorb it with Serbia’s IMF cleanup, Slovenia’s privatization of NLB, and Croatia’s new single borrower rules capping exposure at one-quarter of capital. The local sector has just emerged from the Swiss-franc mortgage conversion mess, and Agrokor provisions will again cramp profitability while the central bank is on standby to offer liquidity. The perennial coalition balancing act could be strained after the main opposition party SDP proposed a no-confidence vote against the Finance Minister, a former senior executive of the company. Another cabinet reshuffle is expected, but the prime minister has fought another election round until alternatives are exhausted to try to advance the economic modernization agenda demanded by EU accession and ratings agencies to forestall further downgrades with the 85 percent of GDP public debt. Balkans interest shifted to Romania amid the fallout as stocks rose 15 percent, but a fiscal deficit blowout to 4 percent, the same as projected growth, has prompted unease. The new government has brushed off IMF recommendations with pension and salary hikes, and was forced to backtrack on a corruption amnesty bill only after massive street protests. The current account gap likewise widened to 3 percent of output despite a weaker currency adjusted for inflation.