No More Learning

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. Interest rates have been on hold but tightening may be forced by the loose budget and a series of scheduled VAT and customs duty increases.

Ukraine has also been a double-digit performer after the Fund released another $1 billion from the $17 billion program and 2 percent growth was achieved in 2016 after years of near-depression. However enthusiasm is muted by the renewed outbreak of fighting in the East coupled with a blockade against the Russia-backed separatists, which President Porochenko, with a 10 percent approval rating, was late to endorse. His former business colleague and central bank head Gontareva resigned her post after spearheading a crackdown against leading oligarchs which won international praise but domestic enmity. In a survey 80 percent of citizens distrusted her policies, and with departure reform momentum may flag at the same time pension and healthcare overhauls are in the works. Privatization of strategic enterprises has yet to resume, and a $3 billion sovereign bond dispute with Moscow is pending in London, while officials have hinted at reopening the recent global deal with commercial holders even as GDP-linked warrants may pay off this year. The prime minister, plucked from a post as mayor, has avoided his predecessor’s corruption taint ahead of 2019 elections, which could be advanced if austerity agony persists.

Iran’s Rouhani Economic Resistance Rut (Asia Times)
2017 May 13 by admin

Posted in: MENA
After a 5% loss from December to end-March, the Tehran Stock Exchange retraced the previous 79000 point level ahead of May 19 elections pitting the incumbent President Hassan Rouhani against a half dozen approved candidates Hard-liners Ebrahim Raisi, a protégé of Supreme Leader Ayatollah Khamenei, and Mohammed Baqer Qalibaf, the capital’s mayor since 2005 and a contender in the 2012 contest, are positioned as the main rivals after the ruling clerics rejected former President Mahmoud Ahmadi-Nejad’s surprise application for another term. In a televised debate these rivals castigated rising unemployment, officially up 1. 5% to 12. 5% the past year despite Rouhani’s international nuclear deal for sanctions relief, which restored oil exports to 2 million barrels/ day for estimated 4. 5% growth according to the IMF. Their campaign platforms draw on the Supreme Leader’s “resistance economy” concept, spurning Western foreign investment and advocating self-reliance and higher cash transfers to the poor and struggling middle class.

Rouhani has acknowledged slow improvement in living standards since the accord went into effect in early 2016, and lapses in bank and state enterprise restructuring to boost competitiveness. His description at the time of the “golden page” in history was overstated and may be further tarnished should President Trump formally withdraw the US from the six-nation pact, but the stock market is betting he and his team could redouble competitiveness and integration efforts with extended tenure. However even with victory these reform wishes could again be misplaced by populist backlash magnified by the race, as the growing tab to rescue government banks and companies again resuscitates recession fears.

Raisi was appointed to head the country’s biggest charitable foundation, with $15 billion in assets in charge of the holiest shrine in Masshad and close ties to the Revolutionary Guards still under Washington’s commercial and financial prohibitions. An Islamic law scholar, he also spent his career working with the security forces and was a member of the notorious “Death Commission” two decades ago which killed thousands of political prisoners. Supporters tout his experience as head of the religious endowment for charting economic direction that is “pro-people and production” and avoids “social shocks,” according to recent statements. In the past four years of Rouhani’s term the Guards have taken over nominally “privatized” factories and properties, and continue to control large chunks through affiliates of leading stock exchange listings. Analysts attribute their dominance to the “corruption, mismanagement and lack of regulation” which continue to place Iran in the lower tier of the World Bank’s “Doing Business” ranking.

Raisi has seized on the rich-poor gap and 35% youth joblessness to call for a tripling in budget cash handouts, even though fellow conservatives like the parliamentary speaker Ali Larjani remind him no money is available with the chronic deficit and 60% of the population escaping tax. He may turn to the central bank and state-owned lenders as an alternative for resource transfer, but so-called quasi-fiscal activities are already high and explain the 20 percent annual rise in the monetary base jeopardizing the single-digit inflation target. President Rouhani managed to slash the rate from 40% to just over 10% with relatively tight policies, and hailed such achievements as “actions not slogans” in re-election rhetoric. Diversification from hydrocarbon dependence has been another hallmark, and the non-oil current account is now roughly in balance with almost $90 billion in exports for the end-March fiscal year, the Economy Ministry reported.

However bank bad loans following local classification rules remain over one-tenth of portfolios, and proposed cleanup legislation that would stiffen guidelines and grant more independent enforcement and resolution powers are stuck in political limbo. The next government may face an outright crisis with “difficult to address” issues including recapitalization and rollback of targeted lending schemes, according to the Industry and Trade Minister. The overdue reckoning coincides with Iranian bank reconnection to the external SWIFT payments network and applications to reopen branches in Europe in Asia, as smaller counterparts beneath the radar of lingering US sanctions forge correspondent relationships. These ties inject new cross-border risk as the dual exchange rate system also awaits modernization, with such obstacles potentially resistant to near-term change by the surviving reform constituency.







China’s Index Inclusion Indentations
2017 May 13 by admin

Posted in: Asia
China’s respective main and A share categories were up 15 percent and 5 percent respectively on the MSCI Index, as the provider is poised to marginally add the latter to the country’s 28 percent global weighting with access upgrades from the Hong Kong Connect experiment. Big houses like Black Rock consulted for the June decision have endorsed progress to begin incorporation, despite existing underweight positions and continued reservations over banking system and currency paths. PMI readings were barely over 50 in April, as the IMF reported that RMB assets were only 1 percent of combined central bank reserves after SDR entry and Fitch Ratings cited internationalization stall the past two years with depreciation and capital outflow streaks. Cross-border bank transfer rules requiring inward and outward matching were lifted, but the state foreign exchange body indicated that onshore trading must deepen and stabilize before broader controls are eased. In March bank hard currency sales were the lowest in six months, but major policy changes will likely be suspended until after the next Communist Party Congress due to extend President Xi’s tenure. He and US President Trump also have been in contact over the North Korea nuclear crisis, but harsher trade and financial moves against ally Pyongyang may in the same vein be postponed until after the leadership conclave. Consensus GDP growth estimates are between 6. 5-6. 7 percent for the rest of the year, and the President recently criticized slow government enterprise restructuring, as planners previewed statistical overhauls and tax cuts.

The benchmark 7-day repo rate passed 3 percent as the central bank embraced “neutral and prudent” monetary policy in view of “alarming” leverage which provoked another shadow banking crackdown in a flurry of risk management edicts. Bond and equity flows though entrusted investments, conservatively estimated at $1 trillion and commingled with wealth management products, could be caught in the net. The Shanghai stock market had the biggest daily loss this year as the securities regulator joined in to punish irregularities “without mercy. ” Insurance will not be spared from coordinated stricter oversight and reporting as assets more than doubled in 5 years to RMB 15 trillion in 2016, and policy holders channeled money offshore to evade restrictions. In April China Minsheng bank was snared in an unguaranteed high-yield offering scandal and trust companies were explicitly order to slash property exposure as credit overall rose 25 percent to the sector in the first quarter. Standard bond issuance in social financing also attracted supervisory scrutiny with banks buying half of all dollar bonds for potential currency mismatch, and the junk category accounting for $12 billion through April compared with $2 billion in 2016. According to JP Morgan data, Chinese corporates have represented two-thirds of global activity, and yields have narrowed toward onshore ones with buoyant conditions and double-digit profit jumps from last year’s nadir. The Hong Kong Bond Connect is scheduled for launch in the coming months to further meld the investor base, as RMB deposits in the enclave otherwise dip to half the 2014 peak, and the local dollar continues to weaken against the greenback. However first quarter mortgage credit soared 80 percent on an annual basis with private home prices again at a record triggering index indigestion.

Sovereign Wealth Funds’ Somber Secrets
2017 May 5 by admin

Posted in: Fund Flows
The latest sovereign wealth fund (SWF) profile from tracker Prequin, after a decade of following the industry, shows assets largely flat at $6. 5 trillion across 75 vehicles. The ten largest control 80 percent of the total, led by Norway with $835 billion and smaller ones in Malaysia and elsewhere have combined for scale. Hydrocarbon earnings provide over half of capital, with the Abu Dhabi and Kuwait Investment Authorities main representatives. Asian countries with large trade surpluses, headed by China, are the other 45 percent and non-energy commodity producers account for just 1 percent of the field. Traditional public equity and fixed income asset classes are in the portfolios of 80 percent of participants, and Ghana and Peru completely allocate to bonds. Private debt and equity also draws a majority, and over half are in alternatives like real estate, infrastructure and natural resources with Kazakhstan and Angola among the examples. Hedge funds are another strategy and take one-tenth of global institutional money there, but their short-term nature and illiquidity limit popularity. Equity engagement can be designed to support the local stock exchange as in Taiwan’s case and Venezuela is rare in having no such exposure after controls forced its market out of the MSCI index. Distressed loans are the chief private debt class, with European banks with EUR 2 trillion on their books the prevailing source. According to consultants Price Waterhouse the SWF definition meet basic criteria, including a clear mandate as a financial passive investor; an autonomous structure to counter the resource “curse” and fiscal imprudence; and distinct governance and operation apart from the government in power. Funds nonetheless can come under official interference and pressure despite nominal independence and protection, as with requests to Brazil’s and Nigeria’s startups to aid the budget and currency and the transfer of post-coup try nationalized companies to Turkey’s.

Turkey’s delegation to the IMF-World Bank spring meetings downplayed such concern and presented President Erdogan’s razor-thin referendum win on constitutional changes as a political stability sign. The next national elections are scheduled for 2019, and the Syrian border situation is calmer with greater territorial control. The GDP growth forecast is 4 percent, and the inflation burst from lira depreciation should recede to manageable single digits with monetary tightening. Externally, the current account gap should remain constant and debt rollover ratios for private companies are above 100 percent, although large holes exist in the balance of payment errors and omissions column. The structural reform agenda, which initially included private pension promotion, will be reactivated in the wake of the plebiscite and concentrate on better public finance management and other higher efficiency areas. Russian representatives likewise cast Western sanctions and diplomatic tensions as a secondary issue, and dismissed recent renewed street protests as a challenge to President Putin’s rule. The ruble has firmed with rising oil prices, and the next budget will be disciplined based on a $40/barrel level. Tax shifts increasing VAT and reducing the payroll levy to tackle informality are in the works, and with good inflation and currency readings the central bank is in gradual rate reduction mode as supervisors continue to clean up the banking system. The deputy governor continues to win international praise for her technocratic deft touch, and was featured on a flagship “emerging market resilience” panel at the Fund meetings amid shaky geopolitics.

Merger Fever’s Testy Temperature Reading
2017 May 5 by admin

Posted in: General Emerging Markets
The latest edition of auditing and consulting firm Ernst and Young’s global capital confidence barometer, surveying thousands of senior executives in forty countries across fifteen industries, was upbeat on global economy and M&A prospects despite geopolitical jitters. It found that digital and supply chain evolution, aided by private equity again on the hunt, continue to propel deals. The worldwide rise in purchasing manager indices has translated into “stretched” earnings expectations that drive buying interest beyond internal growth. Short-term credit and securities markets are stable and improving to support higher valuations, although currency and commodity volatility lingers, according to the poll. Policy uncertainty by geography—US, EU and China—and issues including cyber war, trade protectionism and immigration affect the business model but Eurozone breakup and Chinese debt crisis are low-risk probabilities. Technology disruption may be the leading factor in strategy and tactics, with traditional complications like tax rates and government intervention losing sway. It has resulted in global outsourcing of information and finance functions so companies focus on “core competence,” itself a moving target with increased automation and innovation. Acquisition pace may not return to 2015’s record and will spike this year but not overheat, with over half of respondents on the trail. They are following customers and trying to retain competitive edge, and also looking to simpler relationships like alliances and joint ventures. Methods range from full asset purchase to investment through corporate venture capital units, and high-profile bids will attract scrutiny from activist shareholders. In the US and Europe sentiment is split as the business-friendly Trump administration has triggered optimism, while UK-EU negotiations over Brexit prompt a wait and see stance. China is the number two M&A destination, and this year’s trend toward domestic combinations and inward allocation is opposite 2016’s. State enterprise consolidation in excess capacity sectors like aluminum and steel, along with consumer play shifts in the economic model, will be major themes, the study believes. Brazil and India are also in the top ten countries, and autos, energy, mining and telecoms are the main categories on the radar.

Brazil’s FDI is on solid course as portfolio inflows lift stocks and bonds and chase a raft of initial public offerings such as airline Azul after a long pause. Recession is over and inflation is heading toward 5 percent as the central bank may slide the benchmark rate to single digits. According to regulators banks are in decent shape to tackle corporate bad loan damage, while consumer borrowing appetite is frozen as reflected in flat to negative retail sales. The interim government has proposed aggressive pension reform to accompany long-term spending restraint, but Congress may dilute the package to modest changes phased in over time extending fiscal deficit positions. In the House 60 percent of lawmakers must approve before the bill goes to the Senate, and party discipline has fractured with President Temer’s popularity at a nadir under the weight of overlapping scandals. Top officials at the IMF-World Bank spring meetings assured investors that this social security overhaul attempt would not meet the fate of the previous two decades ago which failed by one vote, but political drama could again doom it if early presidential elections are called due to resignation or popular demand which in limited quarters has repositioned disgraced former President Lula on the stage.

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Refugee Compacts’ Salient Solution Crush
2017 April 28 by admin

Posted in: MENA
A year-long joint global displacement study group by the Center for Global Development and International Rescue Committee cast the issue as a “protracted crisis” and lauded the new aid compact approach with host countries, while urging comprehensive revamp of supporting economic data and policies. Low and middle-income economies host 90 percent of the 20 million refugees fleeing conflict, who are away on average a decade. Only 25 percent are in camps, and humanitarian and development funding and tools have not matched the duration and severity in a “fractured system. ” In 2016 governments, bilateral and multilateral agencies and civil society and private sector representatives met at consecutive conferences to channel billions of dollars to Jordan and Lebanon in initial compact pilots, with a separate pledging session for Syria and the region in London and launch of a concessional loan facility led by the World Bank, allocating $700 million to date, with an associated $2 billion poor country refugee influx window. These pacts work with the UN Commission and other performance based deals kike the EU’s EUR 3 billion to Turkey for Syrian repatriation from Greece and select onward resettlement. Education and job creation have been the main goals and the track record is early but standardized methods and outcome measurement are lacking.

The model of a public-private sector implementation board combining political and technical expertise, as adopted for the US Millennium Challenge anti-poverty program, is absent and impedes shared analysis and planning and rapid negotiation and disbursement timeframes can frustrate lasting results. Social service provision must take into account their scarcity for the existing local population, which typically also has steep joblessness. Refugees are often pushed to the labor market “shadows” and children denied school entry. In Lebanon classes are run in shift for citizens and newcomers, with quality suffering for both amid overcrowding. Jordan committed to issuing tens of thousands of migrant work permits in exchange for World Bank cash and EU duty free import access, but the number has not been reached and only 5 percent are to women. The process is bureaucratic and business startup is also “difficult” with minimum local partner and capital criteria, according to the report. The “right actors” have not been at the table, with limited local non-government input and private sector mobilization at home and abroad. They could be instrumental in putting rigorous assessment and procedure in place and creating an inclusive stakeholder mechanism. Basic information gaps endure across the board, from refugee numbers to job and school enrollment, and cost and impact evidence of integration steps is scant and far from the authors’ ideal of an umbrella policy index. The private sector can inject knowhow, resources and innovation, but collective action like the Partnership for Refugees started under the Obama administration is nascent, with no cross-border coordination capacity. Business and financial firms are equipped to take long-term risk and crisis fundraising could extend beyond philanthropy to commercial sources. Donors could join in sponsoring ventures such as practiced by USAID’s ideas lab. Skills training and infrastructure building are two areas of competitive advantage where compacts could better deliver on promise with enlarged vision scrapping the humanitarian-development divide, the two study backers argue.



Bank Capital’s Stealth Stressful Stretch
2017 April 28 by admin

Posted in: Global Banking
The IMF’s Spring Meeting Global Financial Stability Report departed from previous warnings and hailed emerging market “resilience” with higher growth and commodity prices, and lower credit expansion and corporate leverage, but pinpointed bank capital strains in China and elsewhere despite the positive general shift. It also challenged current optimism about the “benign” rate normalization path in advanced economies, especially in the US, which could stoke asset class risks and volatility and capital outflows concentrated in local bond markets with large foreign investment and frontier destinations with thin reserve and policy buffers. Protectionism either by default or design would hit export revenues and balance sheets and lenders to that sector. Fund flow herd behavior has traditionally come from retail participants, but institutions have pared exposure in recent quarters and big multi-strategy pools unwinding positions can have outsize effects. Last year one firm divested almost 15 percent of a single country’s sovereign bonds in a reallocation, according to the study. Rising costs will add $135 billion in nonfinancial debt, and BRIC borrowers could be most vulnerable. Manufacturing exports as a share of GDP are steep across the universe range including Mexico, Malaysia and Thailand and equity markets have underperformed relative to benchmarks with cross-border trade barrier threats and rethinking of bilateral and multilateral agreements. With reversal metal and oil prices could likewise sink again after recovery the past year and layer another 1 percent onto the company borrowing total. A 300 bank sample shows “comfortable” Tier I capital, with the amount outside China up 20 percent since 2014, but asset quality doubts persist Brazil,. India and Russia have increased bad loans and reduced profits and 40 percent of the cross-section has poor loss coverage. Around $120 billion in further provisions is needed, equal to 5 percent of capital and cutting the Tier I ratio below 10 percent for one-third of the banks, while stronger systems like Colombia and Indonesia would be spared. Foreign exchange risk is another element regulators should closely monitor, and they should offer hedging tools if commercial alternatives are not readily available, the Fund suggests. China is a more urgent case where many mid-tier institutions overly rely on wholesale lines and have asset-liability mismatches, and recent state bank repo operations to inject liquidity may offer only temporary calm.

China’s massive infrastructure programs are feeling the pinch and the World Bank estimates that spending must double over the coming decades to accommodate the 9. 5 billion world population in 2050. The respective shares of multilateral development agencies and private partners, at $75 billion and $150 billion, already trail the annual $1. 5 trillion required, and OECD member mutual, pension and insurance funds, with $70 trillion under control should join the effort in light of lagging returns in other categories. The current developing economy pipeline is estimated at $1 trillion, focused on Asia, Europe and Latin America. , and portfolio allocation should be boosted by an infrastructure bond index under creation at fund researcher Morningstar. The Bank has an array of dedicated project and policy facilities and has linked with the G-20’s global platform created when Australia was chair in a strategy to double guarantees by end-decade. The IFC has a private co-lending arrangement and the new IDA $2. 5 billion low-income window has blended and currency pools for better scaling up to the crushing task, according to executives in charge of internal rebuilding.



The Treasury Department’s Maiden Manipulation Artifice
2017 April 22 by admin

Posted in: Currency Markets
The Trump Treasury Department released its first review of major economy foreign exchange policies after a bilateral summit with China and before the IMF spring meeting, with no Asian partner called a manipulator while Latin America was dropped from coverage altogether. It followed new criteria from 2015 legislation concentrating analysis on countries with at least a $20 billion trade surplus, a current account one at minimum 3 percent of GDP, and annual currency unilateral intervention of 2 percent of output. No country met all three criteria and the report noted reduced interference the past two years, but questioned whether the shift was just a temporary response to capital outflow trends. It reiterated the claim during the campaign that the US has been “unfairly disadvantaged” by artificial distortions and placed China, Japan, Korea and Taiwan and Germany and Switzerland on respective regional monitoring lists. The US current account gap was shaved to 2. 5 percent of GDP in the second half of 2016, but the net international investment position slumped to an $8 trillion deficit. The world economy expanded 3 percent, the slowest rate in a decade, and global demand distribution remains “highly imbalanced. ” Fiscal and monetary policy can correct the tilt but structural reforms, particularly greater competitive access for private versus state-owned firms should be a priority. Chinese capital flight last year was due to local rather than foreign investor exit, including outward direct allocation by big government companies, but new limits have diminished the pace. Outside China net emerging market inflows continued into the last quarter, but currency performance was mixed, with a 15 percent Mexican peso depreciation, while the Taiwan dollar and India rupee were up almost 5 percent against the dollar. The first quarter of this year solidified appreciation tendencies, but global reserves fell marginally to $11 trillion at end-2016 as China and big oil exporters sold off holdings. The figures cannot distinguish between valuation adjustments and interventions, and future reporting and statistical efforts should redress the discrepancy, Treasury urges.

China’s large scale one-way anti-appreciation moves lasted a decade and harmed American workers and business, but from mid-2015 to February 2017 Beijing sold an estimated $800 billion to resist opposite depreciation direction. The authorities still must improve communications and transparency and open further to US goods and services while boosting domestic consumption, the analysis warns. During his recent Florida visit President Xi pledged further banking and securities industry liberalization, but observers pointed out the same commitment from Obama administration economic dialogues yet to permit rule-based majority foreign ownership. Korea too continues to run an outsize current account surplus, and the IMF believes the won is undervalued. Intervention in the spot and forward markets was $6. 5 billion or 0. 5 percent of GDP, reserves are triple short-term external debt and operations should only occur in “exceptional circumstances. ” Taiwan has a pegged exchange rate and its dollar jumped 7 percent versus the greenback in the first quarter. Foreign currency purchases in 2016 were $1 billion/month, and outside experts put undervaluation at 25 percent. It is not an IMF member so does not publish the same reserve data as all other big Asian emerging economies to potentially flag irregularities.

Egypt’s Chiseled Church Chastening
2017 April 22 by admin

Posted in: MENA
Egyptian shares with a slight first quarter bump on the MSCI index recoiled after a spate of Coptic Church holiday bombings claimed by ISIS, as President Al-Sissi fresh from a White House meeting with President Trump who praised his toughness, declared a state of emergency granting security forces more discretionary detention power. The President came to Washington seeking US designation of the Muslim Brotherhood as a terrorist group, as counterparts agreed to expand economic and military cooperation. He freed jailed predecessor Mubarak around the time of the trip, and a $4 billion Eurobond was successfully placed as foreign investors also tiptoe back into local debt lured by tax-free double digit yields. Since signature of the $12 billion IMF loan late last year reserves are up $7 billion to $27 billion, the highest since the Arab Spring. The World Bank and African Development Bank have released tranches as part of the package, but remittances rose 10 percent in the last quarter after an extended fall as workers finally repatriated cash with the official pound float and the dollar rate settled at 16-17. With 50 percent depreciation tourism recovered overtaking safety qualms, and non-petroleum exports jumped 25 percent in January.
Despite headline 3 percent GDP growth, the PMI manufacturing gauge continues to contract, and consumers have been whacked by subsidy cuts and 30 percent inflation. The fiscal deficit spurted to 12 percent of output and unemployment is reported at the same figure although stricter estimates near double it. Dollar shortages persist but officials on the bond road show diverted concern by pointing out imminent offshore gas production from a large field. However with the human rights crackdown Western donors will again come under pressure from advocacy groups to withhold promised aid, repeating the pattern from the military coup against President Morsi in the initial post-Mubarak transition.

Algeria, with hydrocarbons over 95 percent of the economy, had earlier widespread civil unrest and terrorism and has struggled to diversify and reduce state control without official outside help. It recently embarked on a high-profile US investment campaign emphasizing modest fiscal, commercial law and currency adjustments as 4 percent inflation may outpace growth. The central bank predicts dinar stability against the dollar at around 110, and greater competitive scope for the half dozen private banks against dominant government lenders, although the Development Bank will continue to concentrate 90 percent of the portfolio toward small business. The Treasury bond and stock markets will be expanded, and insurance under two-thirds public ownership is a leading target for double-digit annual activity increases. In the Gulf the area is also ripe for international penetration as barriers ease and non-resident investors also snap up new sovereign bonds, where they have taken half of recent deals. In the past the pool was small and local banks as primary buyers rarely sold. Now the size is $250 million and large blocks can be purchased and traded with the entry of additional market-makers. Once uniform top investment grade ratings are more diverse, and repos have developed although long-term hedging products are still lacking. Tax-free financial zones have encouraged participation by foreign pension funds and asset managers, but private domestic peers have yet to establish a broader congregation for fixed income following according to industry experts.



Venezuela’s Chafing Charter Wrongs
2017 April 15 by admin

Posted in: Latin America/Caribbean
Ahead of a $2 billion state oil company amortization in April, Venezuelan bond prices fell to the 40s as the Supreme Court moved to disband the opposition party-led National Assembly in another violation of the Organization for American States (OAS) charter drawing member condemnation. Fifteen countries headed by Mexico had called for political prisoner release and elections before the judicial “coup,” which was reversed when the Attorney General broke ranks with Chavista allies to outlaw the maneuver as unconstitutional. The challenge was the latest senior official blow after February’s US arrest of Vice President El Aissami on drug trafficking charges, and prompted another round of violent street protests against security forces amid worsening food and medicine shortages. Import needs are estimated at $20 billion, twice reported reserves, but oil earnings should rise to $30 billion with higher prices and Chinese loan repayment relief could also provide breathing space. The government is trying to sell PDVSA joint venture stakes to raise revenue but has been blocked in parliament, and the impasse may have animated the mooted closure effort. A miner got a Washington court order to attach oil monopoly assets, as Conoco awaits another likely big arbitration award from nationalization.

Ecuador bonds sagged likewise as President Correa’s chosen successor Moreno defied projections with a 2 percent win over rival former investment banker Lasso, who demanded a recount. The victor, confined to a wheelchair, gained support with his personal courage and common touch, in contrast to the opposition candidate considered aloof and closely tied to the business elite. The legislative majority for Moreno’s party shrank 20 percent to 55 percent, and he inherits a recession and 5 percent of GDP budget deficit after last year’s earthquake which may force resort to the IMF, which offered natural disaster aid.

Elsewhere in the Andeans Colombia’s sovereign ratings outlook was upgraded to stable by two agencies as the current account gap tightened to 4. 5 percent of GDP and fiscal reform was passed in 2016, although peace plan spending may erase immediate tax gains. Economic growth has languished at 2 percent, but inflation has halved to 5 percent on food cost reduction allowing the central bank to cut benchmark rates. In the wake of the guerilla accord and mushrooming Odebrecht scandal, jockeying has begun for 2018 elections, with one of President Santos’ ex Vice presidents set to run, although an anti-establishment outsider could enter in the current charged climate, experts believe. Peru stocks increased the same 5 percent on the MSCI index in the first quarter as the government lowered its growth forecast 1 percent to 4 percent, which would still top the South American charts. Inflation is put in the 2 percent target range this year after consecutive misses, and recent flooding could again damage crops. The budget deficit will remain steady at almost 3 percent of GDP despite President PPK’s consolidation pledge as he ramps up early reconstruction and infrastructure spending. The terms of trade switched with commodity recovery to enable surplus return, but copper value remains heavily dependent on Chinese appetite and despite a flurry of commercial overtures to Beijing another bottoming is factored into metals scenarios.

Africa’s Reshuffled Ratings Deck
2017 April 15 by admin

Posted in: Africa
South African shares after barely positive Q1 performance on the MSCI index stumbled as longtime Finance Minister Gordhan was replaced by the former Interior Minister, a close President Zuma ally amid widening splits in the ruling African National Congress ahead of meetings to choose a successor especially if the full term is shortened with his resignation. S&P led the sovereign ratings downgrade charge to junk with the move, as political infighting will not end stagflation with 1 percent growth and 5 percent inflation forecast this year. Commodities have been battered by severe drought and mining sector consolidation despite better terms of trade bringing the current account deficit below 3 percent of GDP. The rand had stabilized as an emerging market proxy with global investor asset class embrace, but the party intrigues resumed its plunge to the 13/dollar level, postponing possible central bank rate cuts indefinitely. Local debt was not downgraded but fund managers have turned wary and are lukewarm as well on major bank prospects given high consumer borrowing. The fiscal gap target was unlikely to be met with lagging tax collection, and with Gordhan’s ouster the state enterprise reform push may also sputter, increasing contingent liabilities. The government has tried to access development bank lines for flagship utilities like Eskom, but these institutions have insisted on governance and tariff changes. President Zuma’s ex-wife, formerly a top Africa Union official, is in the running for the scheduled 2018 race but her candidacy may be tarnished with name notoriety and lack of business experience. Commentators have raised the prospect of a Trump-like challenger from outside the traditional power bases, including high-tech entrepreneurs, but none have announced intentions and the ANC stranglehold on the nomination process may be too formidable.

Kenya’s MSCI frontier gauge was flat through March ahead of August elections which will rematch incumbent President Kenyatta against perennial opposition stalwart Odinga, who has criticized preparations to date. Growth is favorable at 6 percent but the budget gap is also at that level, and the planned even split between domestic and foreign financing may prove difficult in view of investor memories of past violence and current market conditions. Inflation is again in double digits and Treasury issuance is behind schedule on higher yield demands, drifting toward the 14 percent bank lending rate cap. Externally a $750 million syndicated loan must be repaid in the second half, and concessional source reliance could be jeopardized if the polls again invite tribal warfare. Nigeria placed a Eurobond but the internal debt service/revenue ratio remains steep at 60 percent. The stock market is depressed on meager 1 percent growth, a dollar squeeze as the central bank refuses to relent on official rate control, and poor earnings and prudential results at leading banks. The current account surplus should exceed 1 percent of GDP mainly on import compression as oil production is still constrained by inefficiency and attacks despite rising world prices. The President’s return from unexplained extended medical leave abroad has not lifted sentiment despite his pledge to overhaul the economy with the fervor of the Boko Haram anti-terror campaign, which has overturned previous internal displacement numbers.

Africa Infrastructure’s Pensive Pensions
2017 April 9 by admin

Posted in: Africa
As the G-20 Finance Ministers’ gathering in Germany offered another commitment to raising African investment, international organizations weighed in with a strategy for better mobilizing local and external pension fund assets for infrastructure development. The UN’s special adviser, New Economic Partnership (NEPAD) and the Brookings Institute co-authored a paper noting that despite its priority in the Sustainability Goals, only one-third the continent has access to electricity and roads, and 5 percent to the internet. Annual outlays needed to redress the gap are close to $100 billion, and national budgets contribute just over half that sum. A 50-year agenda envisions high-speed transport and digital networks that can lift intra-African trade from 10 percent to 50 percent, but public investment spending has often been “wasteful” with 40 percent lost to inefficiencies according to project research. Numerous regional platforms and initiatives have been launched to facilitate national and cross-border allocation, and the African Development Bank recently closed a dedicated fund with $850 million in share capital. US, Europe, Asian BRICS, and other emerging market sources are active in the space. Pensions/output is low and dominated by pay as you go schemes outside South Africa, Botswana, Kenya and Nigeria, and infrastructure lacks specific financial instruments. Tax revenue remains low and commercial sovereign bond issuance came to just $15 billion a decade after official debt relief. External development lending and public-private partnership account for $30 billion annually, but OECD-based institutional investors with over $90 trillion under management are a vast untapped pool and they increasingly emphasize environment, social and governance (ESG) factors and long-term commitments key to successful projects. Individual pension funds in advanced and emerging markets can range from $100 billion to trillions. According to surveys only 1 percent is put in infrastructure-related unlisted securities, although Canadian plans in particular are exceptions, with the Ontario Municipal Employees portion at 15 percent. They have joined with development agencies on specific channels with an evolving interest in “green” bonds to promote energy alternatives.

African countries had $380 billion in hand as of end-2013, around $60 billion outside South Africa. Nigeria is second with $25 billion, and Botswana, Kenya and Namibia range from $5-$10 billion. Nigerian funds only received infrastructure authorization under a 2014 law, and regional size is constrained by less than 10 percent labor force enrollment given large informal economies. Recent reforms have concentrate on the guaranteed defined benefit pillar rather than the private contribution supplemental tiers common in other emerging economies. In-house fund manager expertise is often limited and lack of liquidity and mandatory portfolio guidelines are additional deterrents. Municipal, project and corporate bonds are typical structures but broader capital markets are unsupportive, the review notes. Transparency, adequate pricing, government debt benchmarks, and technology platforms are lacking, and cross-border ties could be a catalyst as with the African Development Bank’s Financial Market Initiative. South Africa’s Government Employees fund (GEPF) dominates there and many state enterprises like Eskom also have big pots. The system is regulated by the Financial Services Board and the current GEPF infrastructure slice is 1. 5 percent as the strongbox again may be pried open by ruling party activists demanding higher social amid urgent physical and policy building tasks.

The Western Balkans’ Balky Bloc Formation
2017 April 9 by admin

Posted in: Europe
EU officials, marking the 60th anniversary of the single market and still at odds over issues from Brexit to bank rescue, were at odds again over political and economic direction in the Western Balkans, where investable markets include Serbia, Macedonia and Bosnia and Herzegovina linked on a common securities trading platform. In early March European Council Tusk, after fighting removal maneuvers from his former party rivals in charge in Poland, warned of “destabilization from inside and outside forces. ” Germany has led with infrastructure pledges and extra money was dispatched to slow migrant inflows, and Brussels established a unit to counter Russian “disinformation” around conflicts in Macedonia and Montenegro, where Moscow allies may have attempted a coup. Corruption and organized crime remain scourges from the Yugoslavia civil war era, and Serbia’s accession process has been blocked by old enemy Croatia, and several European capitals refuse to recognize Kosovo. A week after Tusk’s remarks enlargement commissioner Hahn exhorted a “single economic development space” for the six states and praised progress on tariff reduction while citing other cross-border trade and investment obstacles. Russia has encouraged Bosnian Serbs to withdraw from the Federation and endorsed the current pro-Putin stance by Belgrade, which is also under an IMF program. The stock market is up marginally on the MSCI frontier index, and GDP growth is forecast at 3 percent as credit recovers at double that pace. Retail and corporate deposits have reached highs as banks write off and sell bad loans cutting the ratio to 17 percent. Local currency reversion is pronounced as the dinar drifts to 125/dollar, and borrowing rates fall to single digits. Renewed access to offshore commercial credit enabled early repayment of previous obligations, and the picture is now brighter than the rest of Southeast Europe where appetite is flat.

Albania issued a sovereign bond during a recent high-yield boom and just completed a Fund arrangement that will be followed with post-program monitoring. Energy projects lifted GDP growth to 6 percent last year and the fiscal deficit shrank to under 2 percent. Inflation was below target at 2 percent and pension, bankruptcy and tax reforms were enacted. However political standoff is due to stall momentum with an opposition party boycott to insist on a provisional technocrat administration before June scheduled elections. The hefty current account gap persists at over 10 percent of output, but FDI and worker remittances offer coverage and increasingly capital goods imports go to building future productive capacity. Bulgaria had a modest MSCI gain as Borrisov’s GERB party, with a centrist pro-Europe stance, looked to form a government again on the region’s best current account performance with a 3 percent of GDP surplus. Tourism has been a bright spot with visitors diverted from Egypt and Turkey and the currency board regime has been unaffected by the euro’s global fluctuations. Romania rose double-digits on the MSCI frontier on a current account deficit of the same magnitude starting to worry investors on a combination of domestic demand overheating and foreign reserve depletion pressures. Lower VAT and pension and wage hikes have eroded a prudent budget reputation reinforced by an IMF backup facility, and the central bank may soon be forced to tighten monetary policy to seal foundation cracks.

Financial Cooperation’s Benefit Benediction
2017 April 3 by admin

Posted in: Global Banking
Global trade associations and think tanks, wary of Trump Administration “America First” stances leaving currency and trade policies in limbo at its inaugural G-20 meeting, have prepared position papers outlining the merits of regulatory and crisis cooperation through international financial bodies the past decade. The Institute for International Finance released an update on Basel III banking and broader Financial Stability Board capital and liquidity standard harmonization praising the exercise even as it criticized delays and overreach. Risk weighting formulas for the biggest worldwide institutions are in a final phase and may shun internal calculations allowed under previous regimes. The Peterson Institute for International Economics in a separate document warned that President’s executive order rolling back the Dodd-Frank law would undercut the common norm drive since 2008, at the same time that his budget would slash development bank funding. Treasury Secretary Mnuchin had an initial cordial conversation with IMF Managing Director Lagarde, and the analysis notes that previous Republican President Bush bashed the organization before embracing it on Turkey and other rescues, but the current team may maintain distance and insist on historic revamp. The FSB’s work plan is unfinished and the US will soon name a new representative. Pending legislation in Congress would bar Federal Reserve participation in such rule setters as February’s executive decree orders a review of commitments to the Basel Core Principles which could relax current and future regulation. It seeks a “level playing field,” but foreign counterparts including the UK and European central banks fear it could unravel agreements to date and trigger a prudential “race to the bottom. ” As to the global financial safety net bilateral and regional swap lines cannot approach the IMF’s $1 trillion in available resources, topped up with American support also for quota and governance reform agreed in 2009 but only completed in 2015. The US 16. 5 percent voting share still offers a veto but near-term refusal to contribute or membership withdrawal could jeopardize 30 percent of permanent firepower and accelerate big developing country moves toward alternative structures. Under the 2015 bill authorizing voting changes the Congress already required closing of the exceptional access window for outsize bailouts such as in Greece, which was judged to affect Eurozone health more generally.

The World Bank’s IDA facility was replenished in 2016 with a $4 billion US pledge over the next three years, in addition to $1. 5 billion in other unfulfilled development bank obligations. President Kim recently traveled to Africa and previewed $60 billion in medium-term conflict state assistance focused on refugee and fragile populations. Treasury appropriations were reduced several hundred million dollars and the State Department and AID economic accounts were slated for 30 percent adjustments, despite a letter from hundreds of former high-ranking officials emphasizing aid and diplomacy’s importance. Republicans in Congress who opposed the previous administration’s governance and funding decisions have insisted that approaches are long overdue for overhaul and have weighed in on Greece’s 7-year emergency program by discouraging more IMF outlays. European parliamentarians have also turned on their negotiators as another big repayment comes due in June, with Athens balking at further austerity as critics decry its enduring exceptional claims.

The IMF’s Emergency Line Backup
2017 April 3 by admin

Posted in: IFIs
The Center for Global Development in Washington in a working paper called for expansion of the IMF’s two contingency facilities created in the 2008 crisis aftermath with current “volatile” emerging market conditions, as the US Treasury starts to fill its senior ranks amid a budget blueprint slashing multilateral development institution contributions, including all the Department’s own technical assistance to foreign counterparts. The separate Flexible (FCL) and Precautionary Liquidity (PLL) pools were designed for pre-qualification and lighter monitoring than traditional programs. Only a handful of countries—Colombia, Mexico, Poland, Macedonia and Morocco– have applied, with most renewing, as the instruments are bypassed in favor of reserve self-insurance, and regional and bilateral currency swap alternatives. The analysis points out widespread eligibility at reasonable cost, but acknowledges possible residual stigma following immediate creditworthiness gain. Mexico’s $90 billion is the largest, with the others combined less than $25 billion. Its term runs for two years with “strong” polices under the more stringent FCL, with the PLL demanding “sound” economic fundamentals. Exclusionary factors include inability to access global capital markets, high public debt and bank insolvency, and poor data quality and transparency. Based on a series of institutional and macro-performance indicators thirty more countries could be added to the list, according to the Center. Fund resources could easily manage this demand under an assumed quota with $250 billion to be extended, out of $850 billion in total credit capacity. Other crisis buffers available through the ASEAN+3, BRICS, Latin American Reserve Fund, and European Stability Mechanism have more onerous guidelines and similar expense, with the first two requiring a formal IMF agreement in advance. Central bank swap commitments such as the Federal Reserve’s $30 billion to Brazil, Mexico, Korea and Singapore in 2008 soon expired, and they were the only approved recipients. Indonesia tapped the World Bank’s Deferred Drawdown Option instead under tougher terms, and private liquidity provision as organized in Latin America in the late 1990s has not been repeated since and lacks durability. Reserve accumulation continues to entail costs equal to 1 percent of GDP, and a better overall deal cannot be found than the FCL or PLL, the document argues.

A 2013 fifty-member IMF survey cited perceived negative image as the main obstacle, but it may be associated with the organization’s austerity reputation generally rather than the specific products. The financial market implications would seem to neutralize this concern, with Colombia seeing a 10 basis point sovereign bond yield reduction upon its move, while Morocco’s CDS fell by similar magnitude. With global reserves tapering with commodity export slowdown and capital outflows, the timing is right for wider participation which can contribute to global monetary safety, the paper concludes. Mexico has been in the cross-hairs in particular for stress response as the US formally signaled NAFTA renegotiation and preliminary immigration border wall construction in the coming months. Foreign investors have cut short-term Treasury ownership to 30 percent, and the central bank unveiled a new discretionary $20 billion foreign exchange hedging backstop to defend the peso. However growth will be less than 2 percent this year as inflation heads toward 5 percent on currency depreciation which may revive the relative value of IMF spurned innovations.

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India’s Harvard Yard Weeding Waft
2017 March 25 by admin

Posted in: Asia
Indian shares up 10 percent through March were further buoyed by 7 percent last quarter growth defying demonetization gloom and Prime Minister Modi’s strong party showings in state elections cast as a referendum on his personal popularity and economic reform policies. He savaged the downbeat forecasts “from Harvard and Oxford” experts with banknote confiscation targeting illegal funds, and described the continued expansion as vindication for hard work, even though statistics do not capture the estimated 40 percent informal sector hardest hit by the physical cash squeeze. A good monsoon and civil servant salary hike contributed, but real estate and financial services slowed and government spending was the main manufacturing driver with capacity utilization still under 75 percent. However the reading is not final and may undergo downward revisions following the pattern of previous quarters recalculated with changing methodologies challenged by international statisticians. The Prime Minister’s runaway victory in Uttar Pradesh in particular was interpreted as satisfaction with his business-friendly agenda, although average voters focused more on pro-poor rhetoric and the coalition’s financial inclusion platform. Officials continue to sweep bank accounts for evidence of “black money” despite caution by top economic advisers that the crackdown risks overkill. On the tax question, companies and wealthy individuals are already unnerved by Finance Minister Jaitley’s admission that the national goods and services levy rollout due this summer has encountered “teething problems” and may be delayed as states reconsider their own revenue mix. He also panned the “bad bank” proposal to handle the 15 percent NPL load at state-owned lenders as a non-starter since it could jeopardize the 3 percent of GDP budget deficit goal. The central bank is considering faster write-off rules, but corporate credit is flat and many big property borrowers are in trouble after the demonetization fallout. Consumer lines were increasing 20 percent annually and are likely to suffer under tighter classification standards and more lenient bankruptcy treatment for individuals than companies in a new code. The process currently takes 4-5 years, and many politically connected debtors are protected from harsh action. Despite the administration’s anti-corruption vow, the former head of defunct airline Kingfisher, a well-known Delhi insider, fled to luxury exile in London after accusations of defrauding banks and shareholders.

Pakistan national elections will also be held for the first time in two decades in the coming months, with the stock market slated to reenter the core MSCI group on a 50 percent in local terms the past year. GDP growth is 5 percent and daily power cuts have halved after completing an IMF program. On infrastructure a $1 billion road between Islamabad and Lahore has opened and Prime Minister Sharif has negotiated $40 billion in Chinese investment under the One Belt One Road scheme. Consumer goods listings have enjoyed a run, with multinationals like Nestle doubling sales and banks are in the process of more privatization. In the business capital Karachi kidnapping and terrorism incidents may have abated, and the army has claimed rebel suppression in the Federal Autonomous Areas unable to be independently verified. The Prime Minister and US President Trump reportedly have exchanged cordial phone calls, despite the latter’s fulminations against the political and commercial elite with the Sharif family a charter member.

Brazil’s Reconstructed Temptation Temerity
2017 March 25 by admin

Posted in: Latin America/Caribbean
Brazilian stocks continued at the front of the core universe and a $1 billon sovereign bond return was acclaimed at a lower than expected 5 percent yield, despite a poor last 2016 quarter bringing GDP contraction to almost 4 percent, and interim President Temer’s popular disapproval rating rivaling his ousted predecessor. Headline scandals also proliferated, with construction giant Odebecht now facing bribery charges and penalties across Latin America, with Peru seeking extradition of former President Toledo for questionable transactions in office. Local prosecutors are investigating hundreds of mayors suspected of corruption, including for deals around the Rio Olympics as the original Car Wash campaign probe drags on, with courts to determine whether the Rousseff-Temer election ticket should be retrospectively invalidated. The current government head waved off this risk and his unpopularity and went on a media blitz to affirm commitment to structural spending reforms, as reflected in legislation to tie discretionary appropriations to inflation increases over the next decade, and limit state pension and social security outlays out of kilter with global norms. The primary fiscal deficit was a record 2. 5 percent last year and public debt could soar to 90 percent of GDP by end-decade without program rollback. The currency has rebounded along with currencies from the previous trough and facilitated inflation reduction to 5 percent, and the central bank cut the benchmark 75 basis points at its latest meeting and is on track to slash it to single-digits over the coming months. The easing is share-positive and could spur flat corporate and consumer lending on both demand and supply constraints. The new director of development bank BNDES has concentrated on portfolio restructuring and clarified future direction as providing targeted support to justify its subsidy instead of an all-purpose backstop as in the past. FDI assistance is a priority as $80 billion continues to pour in annually to offset capital outflows and cap the current account gap at 1. 5 percent of GDP.

Argentina has been on its own 20 percent roll on the MSCI frontier index and President Macri and his Brazilian counterpart have met and set up commercial and diplomatic teams to revive the moribund trade pact Mercosur, after ejecting Venezuela from the group. The two countries have clashed on auto sector tariffs and the bloc maintains steep barriers against outside goods. The overall trade balance was in surplus in 2016 after a 2015 deficit, with agricultural harvests ample on commodity price recovery and peso collapse subduing imports. Growth has turned positive after last year’s recession and the new Finance Minister, after an early 2017 external bond encore, promises to redress the 4 percent of GDP fiscal gap with measure still protecting the poor. The central bank has kept interest rates around 25 percent with stubborn inflation in the aftermath of floating the peso. The President’s minority party hold in parliament could worsen in upcoming elections, but the opposition Peronists remain too divided for a blowout. One wild card is the possible candidacy of his predecessor Christina Fernandez, now under both criminal and civil proceedings for suspect currency and Iran dealings. The latter claimed the life of the former lead investigator in a shooting incident looking like suicide, amid scrutiny of the government’s self-inflicted policy wounds.

Russia’s Crossed Wire Winnowing
2017 March 19 by admin

Posted in: Europe
Russian shares languished at the bottom of the MSCI Europe pack into March as President Trump’s wiretapping allegations against his predecessor redoubled controversy over previous campaign connections acknowledged by senior officials and under investigation by the US Congress and law enforcement arms. The entanglement continued to raise questions about election interference and cyber-attacks against Washington and critical infrastructure, and sidetracked calls for Ukraine incursion sanctions easing as conflict also worsened there. The recession is over with the oil price again at $50/barrel and inflation may halve to 5 percent with ruble recovery, as the central bank holds rates and limits currency intervention. Single-digit valuations remain at a discount to emerging market peers, but foreign investors have turned wary of domestic legal and political risks alongside additional cross-border intrigue in Europe and the Middle East. In the region Kremlin associates were reportedly implicated in a coup attempt in Montenegro and a Moldova banking scandal unseating the government. Moscow may also demand harsher terms for another bailout of Belarus in the Eurasian Economic Union, after President Lukashenka’s IMF program overtures were spurned. Putin nemesis Navalny was arrested on fresh charges designed to prevent participation in next year’s presidential contest, but he plans to continue campaigning through detention. Human rights campaigners were further appalled by legislation to decriminalize spousal violence, and eyewitness accounts of civilian bombardment by Russian war jets in Syria, where Aleppo was retaken by Assad forces. With the post-2014 financial crisis ebbing state-owned giant Sberbank has revived earnings and the Kudrin structural reform blueprint, which received attention at its height, has faded into the background. Anti-corruption discontent has likewise dissipated, with news of Prime Minister Medvedev’s lavish spending while rejecting elderly pensioner pleas for a raise eliciting a shrug.

However rapprochement with Turkey, where equities have veered positive with a near 10 percent gain, has deepened in recent months, with a mutual pledge to quintuple bilateral trade to $100 billion, and establishment of a Turkish military buffer zone in Syria to battle ISIS and Kurdish rebels. A Russian company is building a nuclear plant, extending energy cooperation as half of Turkey’s natural gas imports are sourced from Moscow. President Erdogan’s sweeping arrests of business executives and government officials after last year’s failed coup has met with no protest, and the seizure of big companies for alleged Gulenist conspiracies has replicated the Kremlin model. Proposed constitutional revisions going to national referendum would allow the President terms to run until 2029 under expanded powers. Deputy Prime Simsek, sidelined as an economic reformer, admitted a short-term “mess” with the lira at a record low and meager growth, but urged investors to stay the course for political system overhaul. The central bank refuses to outright raise rates under presidential hectoring as the regime intends to consolidate large bank and corporate holdings in a sovereign wealth fund to increase economic control and leverage. With private borrowing external debt/GDP is 30 percent, and rollovers may not be as smooth with exchange rate and operating setbacks. Fitch stripped investment grade status in February with expectation of corporate restructuring volume despite the 3 percent headline bad loan number, and a temporary return to double digit inflation as the Islamic Party leadership doubles down on wiring popular dominance.

Kazakhstan’s Contrived Constitutional Corollary
2017 March 19 by admin

Posted in: Europe
Kazakh shares were up almost 30 percent to head the MSCI frontier list through February as President Nazarbaev proposed constitutional changes to decentralize power and chart a succession path, and the two biggest state banks were merged with a $6 billion infusion after the IMF called for “prompt” action in its Article IV report. The 75-year old leader announced 35 amendments that will transfer more authority to the cabinet, parliament and provincial bodies following working group consultations nationwide that spurred over 5000 submissions for post-independence charter improvement. The political transition roadmap was outlined as the country tries to balance its diplomatic and geographic position between China and Russia, and the Fund brightened the GDP growth and inflation forecasts to 2. 5 percent and 6. 5 percent within the target range respectively. The currency strengthened to 310/dollar in March, and exchange-listed privatizations, with major infrastructure and natural resource firms on the block, are designed to cut the non-oil fiscal deficit to 5 percent and official ownership control to 15 percent of GDP by end-decade. Growth last year was 1 percent with the oil price rebound and housing and small business support through a dedicated program to increase domestic demand. Banks remain a weak spot although dollarization has slowed to half the system, according to the central bank. Ratings agency Moody’s in a February survey cited near-term solvency risks with bad loans stuck near 40 percent of the total, and net interest income to stay low among the thirty competitors. Around 40 percent of non-performing assets are lodged at Halyk and Kazkommertsbank, and they will combine after the government agreed to absorb big problem lines, including outstanding credit to another rescued lender BTA, which defaulted on external bonds. Two small institutions got into trouble in recent months for non-payment and one lost its license as the IMF recommended more interventions and liquidations in the February review.

Ukraine rose 20 percent on the MSCI Index, despite renewed separatist fighting in the east and Russia’s lawsuit in London pressing for $3 billion bond repayment, as another $1 billion was to be released under the IMF arrangement following 5 percent last quarter growth. Trump administration views on the conflict have not been articulated despite expressed desire for warmer Moscow ties, although an oligarch close to former campaign chief Manafort was extradited from Austria to the US on bribery charges. Banking reform has been a clear triumph for the Poroshenko government with half the sector shut down after a comprehensive sweep. The central bank after initial delay took on the country’s wealthiest individual and seized the biggest participant Privatbank after finding a $5 billion capital hole from related-party transactions. Capital controls may be gradually lifted as rules were recently eased on foreign exchange trading. The NPL ratio is 30 percent, with domestic banks in the worst shape and Western and Russian-owned ones just bruised, but Sberbank’s portfolio worsened the past two years under dual crises. The headline capital adequacy number is 15 percent of assets, but masks wide differences in institution health. Profitability has not returned and large maturity mismatches endure with corporate and retail exposures. The parliament guaranteed all state bank deposits last year in a bid to restore confidence but not necessarily fiscal health which is also in the Fund rehabilitation orders.



Mongolia Struggles With Financial Instability (Asia Times)
2017 March 13 by admin

Posted in: Asia
Mongolian shares rose 4 percent into March according to Bloomberg’s top company index, after the IMF extended another multi-year bailout for $440 million which can unlock an immediate additional $3 billion from bilateral and multilateral partners.