No More Learning

Plans to open the sector to greater private and international participation have sparked worker protests and been diluted, although a shift could boost efficiency and infrastructure finance scope. Proposals to diversify pension fund allocation from state bonds have been sidetracked as well, with the fiscal deficit again due to breach the original target and hit 5 percent of GDP on subsidy and tax reform delays. Oil price falls should cushion the effect on both the budget and balance of payments, although FDI weakness still hobbles the capital inflow needed to offset the chronic goods trade gap.

Diplomatic sparring with Pakistan despite cordial bilateral visits has endured in the wake of economic and security worries as the stock market there has also descended into the doldrums, with the US threatening to suspend military aid post-Bin Laden, and Karachi still experiencing widespread power cuts and violence prompting talk of a military takeover of the commercial capital. The IMF has refused to extend new lines and the Obama Administration is mulling assistance overhaul that may follow recommendations outlined in a recent think tank document which mentions the importance of engaging fund managers and private creditors to preserve precarious partnership.

The Gulf’s Uphill Upgrade
2011 August 18 by admin

Posted in: MENA
With the Ramadan fasting season underway, Gulf equity markets UAE and Qatar sputtered in their quest to enter the MSCI core roster on respective trade settlement and foreign share ownership shortfalls that will be revisited at year-end. While the denial on technical factors was unsurprising, dedicated MENA investors have cast the decision as a near-miss positive story amid a welter of regional reverses, and cited much more sophisticated Korea’s failure as well to move from emerging to developed designation. The Emirates’ exchanges outside Nasdaq Dubai have just introduced a delivery-versus-payment system, while Qatari officials have refused to relax access and minority stake limits on key listed companies. Such firms recently committed to $10 billion in projects to support Egypt’s transition, including a port around Alexandria. Saudi Arabia had before deposited $1 billion at the central bank there and pledged $500 million in bond buying, while the US offered $1 billion in debt relief and the same amount to guarantee new external borrowing. The coming fiscal year from July projects a $10 billion-plus financing gap which another IMF facility in addition to freshly-planned EBRD lending would have helped bridge but was rejected. The Gulf Cooperation Council’s individual member aid to Cairo coincided with an invitation by the group for Jordan and Morocco to join. The 30-year old club had previously extended a $20 billion economic package to Bahrain and Oman to quell unrest, and endorsed the dispatch of Saudi forces across the strait to Manama. The Jordanian and Moroccan kings unveiled designs for more popular government participation alongside increased social and subsidy spending to discourage protests, and King Abdullah was praised during a Washington visit for the moderate steps. The Casablanca exchange in turn hewed to positive territory until mid-year despite continued street unrest and terrorist incidents that cramp mainstay tourism. In Tunisia where the so-called Arab Spring originated, a $25 billion investment program was presented at the G-8 summit in France to a lukewarm response as participants deferred to the private sector to consider the infrastructure and modernization blueprints. The ousted Ben Ali family was found guilty in absentia of embezzlement and corruption as the thinly-traded bourse remained down.

For Bahraini paper the rating tendency has been opposite as banks joined the sovereign in May credit downgrades on financial services, real estate and hospitality weakness “in light of recent political turmoil,” according to Moody’s. A $1 billion international bond has been delayed after a $200 million issue early in 2011, which contributed to a Q1 $30 billion regional sukuk tally as compared with $50 billion for all of 2010. Egypt and Jordan had started to implement Islamic finance rules before their violence erupted and upgrades to other traditional structures took precedence.

The Caribbean’s Debt Shoal Shuffle
2011 August 2 by admin

Posted in: Latin America/Caribbean
Tiny Eastern Caribbean Currency Union member St. Kitts and Nevis became the latest defaulter on public debt at almost 200 percent of GDP, with only Treasury bills to be excluded from a $1 billion restructuring after “sharp” tourism and FDI falls, according to the prime minister’s office. Medium-term government finance reforms will be supported by a $85 million 3-year IMF standby loan as officials work with creditors toward a “credible and definitive solution” to the immediate crunch. In the region in the past few years Grenada, Dominica and Belize followed this path, while Jamaica narrowly avoided the fate with a comprehensive local bond swap emphasizing maturity extension. The blow came as the Fund hailed the islands’ “turning the corner” from recession in its April Western Hemisphere economic outlook. Two percent average GDP growth is forecast on better visitor and remittance numbers and fiscal consolidation. High commodity import prices remain an obstacle with limited scope for subsidy cushions, and labor productivity and overall competitiveness lag. Cross-border contagion lingers from the collapse of the Trinidad and Tobago-based CL Financial Group where contingent liabilities could reach 10 percent of output there and insurance subsidiaries in Barbados and elsewhere struggle with outstanding claims. The report urged export diversification and cited the importance of meeting international prudential, tax and anti-money laundering standards in the area’s 15 offshore financial centers. Only Montserrat is on the FATF “grey” list, with the other jurisdictions now all with “white” status including half a dozen UK overseas territories. With improved domestic and global standing, rater Moody’s recently issued a “favorable” prognosis for major banks with some caveats for Jamaican players with high government paper asset concentration.

National income turned positive in Q1 as an aluminum plant reopened but the primary budget surplus target was missed under Jamaica’s IMF arrangement although the overall deficit was constant. Remittances from North America and Europe were up double-digits, bringing foreign reserves to a record $2. 5 billion. The local dollar has been stable even as the current account gap could approach 10 percent of GDP on imported petroleum costs. Both the stock and bond markets were LAC outperformers in the first half, although momentum has started to flag. Trinidad and Tobago securities have not fared as well on 10 percent inflation and a 6 percent of GDP fiscal deficit despite hydrocarbon exporter rebound, while in Barbados additional domestic placement sent the island’s debt level to near 105 percent of output to overshadow sunnier tourist diversification progress.

Debt Managers’ Stockholm Syndrome Symptoms
2011 August 1 by admin

Posted in: IFIs
As European governments individually and collectively scramble to overcome liquidity, rollover and other risks associated with classic debt crises, the IMF lauded emerging market lessons in a regular roundup of compliance with the so-called best practice Stockholm Principles. In particular capital inflows have extended local currency maturities over the past decade, causing “less severe stress” in the immediate post-2008 crunch. The average sovereign bond tenor is 4 years, and floating and foreign currency-linked versions account for under 20 percent of the amount outstanding. Non-resident holdings have grown from one-quarter to one-third of the total, as net credit rating changes have been overwhelmingly positive in contrast with advanced economies. The paper urges low-income countries to embrace such steps as they become increasingly eligible and equipped for commercial borrowing. In the Lehman bankruptcy wake foreign buyers “abruptly departed,” compelling issuers like Hungary, Poland and Mexico to resort to shorter-term and adjustable placement features. In Central Europe the primary dealer auction process was also modified, syndicates were supplemental agents, and calendars were accelerated. Liability management operations were mounted to smooth repayment and yield curve characteristics, and cross-border investor diversification was emphasized with outreach to Asia and the Middle East. Over-reliance on outside appetite should be avoided however as put into “sharp focus” by current euro area emergency facilities to Greece, Ireland and Portugal. The entire portfolio should be subject to mutually-reinforcing sovereign and financial sector balance sheet worst-case scenarios as outlined in guidelines dating from the 1990s Asian financial crisis. A low rollover profile is welcome and has distinguished UK requirements from continental Europe. In cases like Chile and Russia national wealth funds can be tapped for additional liquidity, and retail and institutional investors can be further targeted through smaller lots and innovations including inflation-linked paper.

Brazil and Mexico had managed to lengthen maturities and also offer a range of exchange-traded and over-the-counter derivatives for hedging prior to the 2009 squeeze. Turkey’s finance ministry has actively run debt exchanges, and even irregular sponsors like the Philippines have recently completed large longer-dated swap exercises. The analysis concludes however that the proposed Basle III regulatory changes beyond capital for liquidity and leverage ratios could “create problems” in countries where debt markets are thin especially in relation to banking size. Repos and secondary activity could be constrained, and financial institution warehousing of safe instruments could interfere with normal lending patterns. Before the euro-zone crisis worsened the BIS estimated that over EUR 1. 5 trillion would be needed to meet the new standards that no longer hold sympathy for ailing banks as well as nonbanks which could be hostage.

East Africa’s Ignited Inflation Sparks
2011 June 20 by admin

Posted in: Africa
The Kenyan shilling fell to a record low 90/dollar as food prices jumped 20 percent and Ugandan regime opponents and the central bank head also railed against double-digit inflation as the two East African community linchpins postponed integration initiatives to concentrate on individual stabilization plans. The Nairobi exchange has been down all year as the GDP growth forecast lagged the Sub-Sahara average at 4-5 percent and political positioning began for 2012 presidential elections which seek to avoid repeating the tribal carnage of the previous disputed race. The ICC has questioned leading officials, including Finance Minister Kenyatta, about their role in fomenting violence then which could result in formal indictments. The benchmark rate was initially increased 25 basis points on the inflation spurt but the monetary authority has since been criticized for slow reaction as bond yields widen several hundred ticks with auctions undersubscribed. Debt market turnover had quadrupled to 20 percent of GDP in 2010 as intermediaries and regulators introduced numerous operating and systems upgrades. An over-the-counter framework will supplement prior mandatory exchange trading and be run by designated primary dealers; central depository automation has improved; and short-selling will soon be permitted. Equities have embraced their own moves such as transition to a shorter T+3 settlement cycle. Despite the revisions, investment will be cramped by indefinitely higher agricultural and imported oil costs, with the energy commission recently imposing hefty rises for consumers and businesses alike. Labor unions have responded to the living standard erosion by demanding 50-60 percent wage increases which the government claims would worsen the fiscal deficit and domestic debt load as a maiden external bond issue is contemplated with a B+ sovereign rating.

Neighboring Uganda has discovered oil but food crop inflation hit a regional high at 45 percent in May, as just re-elected President Museveni who has ruled for 25 years jailed his main opponent after prolonged street fighting over economic and political direction. European donors have suspended aid in view of alleged poll fraud and the harsh crackdown, and the longstanding central bank governor has also criticized fiscal indiscipline which caused the IMF to assign unsatisfactory marks in its latest program review. $750 million was spent for a fighter jet and a supplementary budget was passed during the campaign with ample voter largesse. Foreign reserves, after post-crisis rebuilding, have now been commandeered to defend the shilling, and although the official poverty rate has dipped to 25 percent, population growth has not abated leaving a large cohort of angry youth with scant income and formal employment prospects to resort to their own guerilla tactics against the former anti-Amin rebel chief.

Peru’s Milastone Mining Militants
2011 June 20 by admin

Posted in: Latin America/Caribbean
Former Peruvian army general Humala’s surprise win in the second-round presidential runoff triggered brief investor panic as the Lima exchange’s double digit year to date slide equaled Egypt’s at the bottom of the core universe heap on his calls for a tougher mining regime and greater anti-poverty push to accompany the country’s torrid GDP growth. Through June cross border inflows into bonds and equities were both modestly positive according to fund trackers, aided by enthusiasm over a formal merger with Colombia and Chile in the combined MILA platform. However upon securing victory Humala advisers immediately proposed revamping the arrangement, which they claimed unduly favored the other parties. Officials in Bogota where a first-stage integration was due rejected the charge as the local business and financial community, which heavily voted for his opponent Fujimori, awaited formal cabinet picks for key economic posts that were predicted to be centrists to project transition confidence. The central bank head may remain in place after meeting with incoming administration representatives and signaling no abrupt further tightening moves with steady inflation and currency readings. Stricter oversight on consumer lending is likely with the new government to curb the rapid pace and protect unwary borrowers who blame banks for misrepresenting installment credit procedures. In the minerals sector, royalty and tax treatment may be changed to maintain a fiscal surplus with workers and communities to receive higher project proceeds. During the campaign the refashioned socialist candidate pledged that state control and interference would not drive such departures which would be negotiated with private operators in commercial fashion.

Nonetheless Venezuelan President Chavez was among the first to congratulate his old ally despite traveling to Cuba for emergency surgery. His undisclosed condition was preceded by weeks of walking with a cane for an ailing knee, raising medical doubts about running for another term next year, especially with his popular approval barely at a majority. Inflation tops the region at almost 30 percent, and GDP growth will be in the 2 percent range this year after 2010’s recession as housing and power shortages linger. Humala has hinted once in office his model may be labor activist turned conservative manager Lula in Brazil, which has experienced serial setbacks since his successor Dilma assumed power. Chief of staff Palocci was again forced to resign over suspect influence peddling enrichment after a brief rehabilitation, and bank listings have suffered in an overall 5 percent stock market decline on warning that personal bad loan levels could hit 10 percent of the total soon, as regulators otherwise attempt to curtail hefty credit growth even through the state lending giant BNDES as that carnival season fades into memory.

Europe’s Original Rescue Return Reticence
2011 June 15 by admin

Posted in: Europe
After years under official IMF and Euro-zone lifelines Iceland, Latvia and Romania returned to external bond markets almost the same week in well-subscribed efforts despite lingering doubts about output and banking sector recovery and currency and structural reform paths. The first two countries are in battles with creditors over bank resolution, with the Icesave UK and Dutch depositor claims now referred to the European Court of Justice after reimbursement was again rejected in a national referendum, and Latvia’s Parex has been challenged by foreign hedge funds over minority shareholder rights. Capital controls remain in place to prevent a run on the krona, while the lat peg has stayed intact without an updated timetable for joining Baltic neighbor Estonia in outright euro membership. Romania’s leu has strengthened as the current account deficit will slim to 4. 5 percent of GDP after years in double-digits and a successor Fund/EU standby facility was agreed. Bucharest and the tiny Sofia stock exchange next-door with 25 percent gains continue to lead the frontier Europe pack despite jitters over the fate of Greek-owned local financial groups. Bulgaria is on track for 3 percent GDP growth as the unpopular government faces another parliamentary confidence vote on a fiscal squeeze to safeguard the currency board and avoid resort to outside international help. The central bank reported accelerated capital outflows in Q1, and although exports and FDI have progressed a property overhang weighs on business and consumer sentiment. The main ethnic Turk political party has been critical of tight-fisted policies and anti-corruption strides and draws a contrast with the middle-class economic success of Turkey proper, where the Islamic-oriented AKP just won another mandate after a decade in power short of the majority to unilaterally change the constitution.

Its stated commitment to fiscal-monetary and religious moderation is regularly cited by foreign investors, who await a similar signal in Egypt during a precarious transition. The stock market there is stuck at a 25 percent decline despite multi-billion dollar pledges by the Bretton Woods institutions and Arab and African sources to cover budget and balance of payments deficits this year. Inflation is at 12 percent as Treasury bond yields hover at the same level on lackluster auctions exclusively relying on domestic banks. Many listed companies are under investigation for previous regime ties and are also suffering earnings setbacks from travails elsewhere in the MENA region. Corporate and personal accounts have reportedly been shifted to Dubai institutions as the city-state plans again to tap voluntary bond markets as well when reflexes are temporarily nimble.

China’s Local Sewage Streams
2011 June 12 by admin

Posted in: Asia
Chinese shares were down after early year gains as bank worries were added to macroeconomic and corporate governance ones with regulators reportedly preparing for a one-third or over $450 billion local government bad loan scenario without property or other collateral payment coverage. They are attempting to boost municipal bond and secondary trading channels to cushion portfolio fallout as existing investors have questioned use of project funding for stated purposes with alleged diversion of large infrastructure outlays. Repeated reserve requirement hikes have slowed still double-digit money supply growth as both inflation and GDP expansion have tapered on a lower trade surplus and commodity prices. Ratings agencies predict that the NPL ratio for state commercial banks already planning to raise additional capital could hit 10 percent next year. After successful ipos in the US mainly through so-called reverse mergers many Chinese companies have been accused by research houses and investigators of disclosure lapses and balance sheet manipulations choking the pipeline as mainland and Hong Kong placements also languish after initial enthusiasm. With unsettled conditions real estate issuers that had frequented the high-yield external bond market have been absent, as buyers fear another round of unfriendly negotiations around looming defaults. In Shanghai both A and B shares are in the negative column, and the slide has implicated Taiwan as cross-strait ties again prove menacing. However performance has been worse in the other Asian BRIC India, off 10 percent on the MSCI Index, where foreign investors overwhelmingly prefer corporate and government debt in their $3 billion net allocation through June with the central bank on a prolonged tightening cycle. The Singh coalition is fighting to re-establish momentum after a string of corruption scandals sparking a national protest movement led by a prominent faith healer. Private banks may be given more competitive leeway provided they set up separately-capitalized subsidiaries to redeem the prime minister’s promise immediately after securing a second term.

Neighboring big regional exposure South Korea has ceded ground on lackluster domestic demand to supplement exports and steep household debt at almost 150 percent of income with rising adjustable rate mortgages. The North Korean dynastic succession has been bumpy and presidential elections are due next year with the unpopular incumbent, who had originally been praised for his business rather than political background, unlikely to benefit any designated candidate. The Philippine and Thailand are struggling in part due to dual Chinese and Japanese squeezes, in addition to fiscal and monetary policy shadows that already obscure Asia’s giants.

Fund Flows’ Roped Pool Lane Refuge
2011 June 10 by admin

Posted in: Fund Flows
Through June tracked fund divergence intensified according to EPFR collection as equity outflows at $7. 5 billion hit all major regions as debt moved $4. 5 billion in the opposite direction with all core countries getting inflows. In the former category Asian dedicated funds represented over half of flight, led by Chinese ETF escape, and Russia reversed a previous positive allocation course with year to date overall capital exit exceeding $30 billion by central bank calculation as inflation hovers stubbornly at 10 heading into the presidential election season. By region only Africa has seen a minor infusion, along with a smattering of frontier and long-established markets in Europe and East Asia. On the bond side Brazil and Mexico have topped the pack with around $1. 5 billion each received, with local currency and blended versions fare exceeding traditional dollar and euro-denominated vehicles. Japanese retail investment trusts with assets of $65 billion have become large players in their own right with heavy Brazilian concentration. The fixed-income allocation has been driven by poorer industrial production and retail sales data cramping GDP growth forecasts, exchange and interest rate tightening expectations as commodity price inflation may have peaked this cycle, and peripheral Europe aversion as the Greek default saga lingers and Portuguese 10-year yields score records even as the center-right free market oriented oppositions won a convincing election victory. Spain may soon join Ireland in the ailing more developed contingent with regions declaring their precarious solvency after recent national polls as they breached the 2. 5 percent of GDP ceiling agreed with the central government. In Central Europe long considered stability bastions have also lost favor as Poland may have finessed observation of the 55 percent of GDP public debt limit with derivative transactions and the Czech Republic’s ruling coalition continues infighting that compromises promised budget cuts.

For stock funds Korea commitments have waned as the central bank extends rate hikes with household borrowing at 150 percent of income and floating rate mortgages the standard. Africa structures have taken in $35 million after last year’s billion-dollar bonanza but Kenya’s shilling has plummeted to near 90 on double-digit inflation and drought bringing GDP growth under 5 percent. Ghana’s exchange is up over 30 percent but the cedi continues to depreciate as the fiscal deficit overshoot provoked IMF criticism in the latest review of its post-crisis $600 million program. Oil will spur historic economic expansion this year even as fund conduits spring unaccustomed leaks.

Hungary’s Household Help Chores
2011 May 31 by admin

Posted in: Europe
Hungarian shares fell after a Central Europe-beating spurt as the government unveiled medium-term foreign currency mortgage borrower relief and reacquired control of big listed oil company MOL after paying EUR 2 billion for a Russian company stake taken during the 2009 crisis. The homeowner deal will freeze the forint-Swiss franc rate at 180 for several years to aid servicing and lift a foreclosure moratorium although repossession will be confined to just a fraction of the pending portfolio. State financing will be available for family relocation to smaller properties to reduce the overhang and real estate bad asset vehicles could be established by separate legislation. The biggest local bank OTP was lukewarm on the plan as it grapples with a consolidated 15 percent non-performing loan load, while foreign-owned units criticized it as distorting and delaying cleanup as they also bridled at official suggestion of extending special taxes to shrink the budget deficit through mid-decade. Without the levies and commandeering of private pension funds the shortfall would be 7 percent of GDP this year rather than 3 percent, according to statistics. The costs of mortgage assistance and the MOL purchase have yet to be fully delineated as public debt stands at 75 percent of output with a recently-enacted constitutional edict to cap it at 50 percent through slashing judicial review seen as much as an assertion of ruling party dominance as a commitment to fiscal prudence. It will also introduce a new central bank statute with greater political accountability to redeem a campaign pledge which may spark loosening as rates remain on hold despite above-target 4 percent inflation. Q1 GDP growth was 2. 5 percent, double last year’s pace, but industrial production remains sluggish and business and consumer confidence readings are low. Crossover buyers have supported local and external debt prices as CDS spreads have converged with pan-European levels, but erratic policy jitters post-IMF program exit have resurfaced according to auction and issue organizers and participants.

Latvia too, which is approaching graduation and successfully returned to the Eurobond market, has unnerved investors with an inflation spike to 4. 5 percent and call for new elections after anti-corruption investigations in parliament encountered roadblocks. Q1 GDP growth slowed to 3. 5 percent, and unemployment is still 15 percent. Parex Bank which had to be rescued by the authorities and EBRD has experiencing difficulties reimbursing a syndicated loan as the Finance Ministry has confessed to fiscal consolidation “fatigue” which may tire allocation appetite.

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Serbia’s Kindled Capture Attention
2011 May 27 by admin

Posted in: Europe
Serbian shares up 30 percent as MSCI frontier leaders were boosted further along with the currency by the arrest after a 15-year pursuit of accused war crime mastermind Mladic, who apparently lived unnoticed in a remote farming village. His apprehension was a precondition in formal EU accession talks which have proceeded slowly with Brussels’ preoccupation with member debt crisis and pending crime and anti-corruption and Kosovo relations strides. Portfolio investment leapt tenfold in the first quarter from the previous one to 2 percent of GDP as the last installment of the IMF’s EUR 3 billion standby was given and the government laid the groundwork for another arrangement heading into 2012 elections. Q1 economic growth was 3 percent underpinned by exports, but inflation touched 15 percent due in part to bad weather food costs as the central bank lifted its benchmark rate to 12. 5 percent. The current account deficit has worsened slightly from last year’s 7 percent of output on external debt at 70 percent of GDP. Bank credit to businesses and households is again expanding at double-digits on a system loan/deposit ratio of 135 percent, as the EBRD warned at its annual meeting of potential Greek network spillover. Although the privatization and pension reform record has been mixed under the Fund program, ratings agencies have praised fiscal consolidation in awarding recent sovereign upgrades. As a tiny EMBI slice foreign investors have taken positions in external bonds and also moved into local T-bills. The exchange along with other ex-Yugoslav ones shares data with the Vienna bourse under an information and commercial partnership, and Austrian units control 40 percent of Serbia’s financial services. As it bids for official EU candidate status WTO negotiations are also proceeding with a target entry date of early next year.

Croatian shares in comparison are ahead modestly as under its own economic recovery plan the government seeks to escape recession and pare the 5 percent of GDP budget gap. The coalition remains weak with end-year elections in sight, and ship-building in particular has slumped. Slovenia ended its hold on the country’s EU submission, but popular support for inclusion sank according to opinion polls after wartime generals were sentenced by the Hague’s International Criminal Tribunal. 30 of 35 chapters have been closed but formal admission has likely been postponed past mid-decade. Competition policy is a key sticking point with many state firms still receiving preferences and subsidies and anti-monopoly laws lacking as the Balkans’ heavy history relinquishes longstanding protections.

Kazakhstan’s Acclaimed Candidate Cant
2011 May 26 by admin

Posted in: Asia
Kazakhstan’s veteran central bank head Marchenko was proposed by the prime minister as an IMF managing director nominee with Russia’s endorsement against emerging market candidates from other regions, as President Nazarbaev, after winning re-election with a 95 percent margin, hosted the annual EBRD conference in Astana. Marchenko’s chances were immediately dismissed by global succession-race watchers, and he admitted scant enthusiasm for returning to Washington after a brief study spell in the 1990s. The President’s victory on reported 90 percent turnout was tainted by “serious irregularities,” according to an international observer mission from the Organization for Security and Cooperation in Europe which he chaired under a regular rotation. Originally the exercise was a referendum on indefinite term extension, but a last-minute runoff was called giving the limited legal opposition little scope to compete. Parliamentary polls are due by next year which will give challengers another chance, regime supporters pointed out during the EBRD’s session, which focused on potential loan and technical assistance expansion to the “democratizing” MENA area. Kazakh authorities have already backed new client activity in nearby Mongolia in cooperation with China, which has large mining investments and a yuan trade settlement facility there in a similar relationship. National oil production is 1. 5 million barrels/day although the Kashagan field project remains stuck in environmental and royalty clashes with foreign partners. Kazmunaigas has doubled its stake in the consortium after previous disputes, and a partial sale is possible under upcoming “people’s IPO” which have buoyed the stock exchange and will be dual-listed in London under preliminary privatization plans.

The sovereign wealth fund S-K is trying to unload holdings after injecting $6 billion in BTA and Alliance Banks during the crisis, as the sector still struggles with a 30 percent bad loan portion concentrated in real estate and consumer lines. Even with another year of commodity driven 7 percent level GDP growth, credit provision is flat. Tax law changes may facilitate write-offs, and the central bank may establish a separate distressed asset vehicle to aid workouts. Post-2008 deleveraging has halved the loan-deposit ratio to below one, and despite regular intervention to brake appreciation the currency is heading toward 140 to the dollar. Foreign exchange reserves have been rebuilt to near $40 billion on a 4 percent of GDP current account surplus, although inflation is again veering toward double-digits on higher food prices. Neighboring Russia is also battling that scourge as it enters its own presidential election season, with the candidate crop still on the vine as earlier equity gains wither.

The World Bank’s Multi-Polar Disorder Prescription
2011 May 25 by admin

Posted in: IFIs
The World Bank, under the auspices of its chief economist well-known in Chinese policymaking circles, published the first in a coming series of long-range Development Horizons studies predicting multi-currency use in 2025 based on emerging market-led commercial and financial “poles” guided by the BRICs. Developing countries now account for half of international trade and one-third of their FDI is “South-South. ” Two-thirds of official foreign exchange reserves are outside the industrial world, and related sovereign wealth funds are among the largest institutional investor sources. Borrowers such as Chile, Turkey, and Brazil command lower spreads than European counterparts, yet since the collapse of the Bretton Woods system 40 years ago no reserve currency from these jurisdictions has entered the mix with the dollar, euro, yen, and pound, and the IMF-created SDR likewise lacks such a component. Over the next decade and a half emerging economies’ GDP growth over an average 4. 5 percent will be double the advanced country norm, and the half dozen biggest ones will power the majority of global output. They have moved to the faster trajectory initially through total factor productivity — in land, labor and capital — gains that may soon join with innovation strides, as “rebalancing” occurs through switches from external to domestic demand. In China consumption will rise to over 50 percent of GDP during the period, with Latin America’s share already at 65 percent. Cross-border M&A from emerging market firms was one-third the world figure in 2010, and many active acquirers are able to tap billions of dollars through international bank loans and debt and equity financing, as well as access comparable sums in local capital markets. The net creditor position of major EMs will exceed $15 trillion under the study’s baseline scenario, setting the stage for a multi-polar monetary system to accompany trade and investment flows.

The renimbi will likely feature at the forefront of new entrants, according to the authors, as convertibility restrictions are progressively removed. Commercial trade settlement and bilateral and multilateral central bank arrangements have proliferated under incremental liberalization, and the currency could first be adopted as an Asian standard before receiving more widespread acceptance. The yuan could join with other emerging market units in a redefined SDR with the endorsement of G-20 Fund shareholders, who could also encourage private circulation of the synthetic denomination as an alternative to national and regional offerings. In this more diverse future, however, the preponderance of developing countries with their small heft will remain at risk of foreign currency mismatches and vulnerabilities even as the “fortress dollar” cedes impregnability.

Vietnam’s Wavering Resolution
2011 May 25 by admin

Posted in: Asia
Vietnamese stocks deepened their loss string despite Hanoi’s hosting of the annual Asian Development Bank gathering as inflation burst past 20 percent to challenge the recent “resolution 11” fiscal and monetary tightening package. The measures originally triggered brief equity and bond rallies as the benchmark interest rate was taken to almost 15 percent and officials vowed otherwise to throttle runaway credit at 120 percent of GDP. At the same time to revive currency confidence, they suspended further devaluation while cracking down on informal dollar and gold trading. However ADB participants were told that economic growth would likely slow to 5 percent as the trade deficit continued to widen to 15 percent of output, with international reserves not reported but estimated at around $12 billion. To cut the budget deficit, fuel and electricity prices were lifted, and food also jumped on anxiety ahead of the spring harvest season. Ratings agencies, after pausing from last year’s downgrades, reinforced jitters with calculations that sovereign contingent liabilities could hit 60 percent of GDP under the weight of state bank recapitalization and bad loan coverage. NPLs using local standards are under 5 percent, and after repeated criticism of data and transparency the central bank has agreed to a formal IMF-World Bank comprehensive financial sector assessment to identify prevailing conditions. The default by shipbuilder Vinashin has not been addressed despite a stream of creditor requests for meetings and negotiations. Companies have been unable to tap the external debt market despite the success of neighboring high-yield borrowers such as Chinese property developers. Regional and US-European individuals and institutions have heavily subscribed these double-digit return issues which increasingly feature “perpetual” structures. In a much-noticed example, unrated Sino-Ocean Land completed a $400 million 10 percent deal in the wake of fraud found at other lesser-known mainland placements like China Forestry, which had partnered with the Washington, DC-based Carlyle buyout firm. Asia dollar-denominated activity was at $35 billion in May, with medium-term projections by underwriters for $100 billion annually.

The Philippines exchange has also been floundering after the central bank raised rates on consecutive occasions to keep inflation below 5 percent, despite fiscal improvement which may limit the deficit to 2 percent of GDP should current patterns hold, even with a new public transport cash transfer program for operators and riders. Remittances which undergird the balance of payments have dropped on troubles in Japan and the Middle East, and should they spread to core Gulf locations Manila may have to form its own resolution stance.

South Africa’s Stalwart Alliance
2011 May 20 by admin

Posted in: Africa
South African shares slid clearly into the negative column after the opposition Democratic Alliance held the ruling ANC to a 60 percent popular vote in local elections and diversified its support base beyond better-off white citizens. National opinion surveys revealed routine dissatisfaction with public service delivery which DA control in Cape Town had worked to rectify, and poor marks assigned to President Zuma’s anti-poverty and unemployment record since taking office.
The ANC’s Youth League has mounted its own attack on the government for shrinking from stronger state economic intervention including nationalization and capital controls, while the labor union federation has assailed its “corruption and greed” as it presses for wage rises above current 4 percent inflation. Planning Minister Manuel has openly warned of reverse racism affecting business policy, with black majority interest groups accusing successful Indians of “colonial” behavior. Despite the commodity boom in gold, platinum and other minerals, GDP growth at 4 percent lags Sub-Saharan neighbors as household debt and lackluster private investment weigh on prospects. The PMI hovers at 55 with ample slack in manufacturing capacity, although auto activity has recently picked up in contrast with the moribund clothing sector. The rand remains a favorite carry currency with benchmark bond yields at 8 percent, but has tumbled to 7 against the dollar as the current account deficit is set to widen to 3. 5 percent of GDP. Inflation, pushed by oil import costs, is due to touch the upper 5-6 percent target range, but the central bank has paused in its hiking cycle. Europe’s and Japan’s difficulties are choking exports, as trade and financial ties with fellow Brics deepen following the country’s debut at an April summit in China. Local fund managers have already redirected debt and equity allocation to these outside big emerging market destinations following capital account liberalization in the last budget.

Firms have also signed up for a major foreign investment conference in Zimbabwe as octogenarian President Mugabe calls for fresh elections to end the teetering coalition and immediate implementation of the indigenization law mandating 51 percent ownership of multinational operations. Discussions with Western official lenders on clearing $7 billion in accumulated debt are at a standstill, as domestic banks also grapple with non-performing portfolios at one-third the total. The central bank itself had to be recapitalized and no longer manages exchange rate policy with the multiple circulation of the dollar, euro and rand. Despite the political push by ZANU-PF loyalists, economic officials have questioned whether the $500 million estimated expense of new polls is affordable as democracy and free-market campaigners are crushed by mounting bills.

The Pacific Alliance’s Bellicose Bluster
2011 May 18 by admin

Posted in: Latin America/Caribbean
Stocks were unmoved from slides to date as Chile, Colombia, Mexico and Peru formally joined in a “Pacific Alliance” representing one-third of Latin American output and half of exports. The three outside Mexico had previously linked up through the MILA joint exchange which will be second in size to Brazil’s at $700 billion. The broader initiative will extend free trade and labor movement multilaterally to complement bilateral pacts. Lima’s index has been down over 20 percent with the even match between leftist Humala and conservative Fujimori for the presidency after the business community’s favorite candidates faded. GDP growth could fall by one quarter to 6. 5 percent this year on softer construction and manufacturing despite 20 percent annual credit expansion, according to officials. Inflation is over 3 percent, and the central bank has continued 25 basis point interest rate rises as rater Moody’s recently warned of overheating. Humala’s original campaign platform vowed renegotiation of mining agreements and higher corporate taxes to fight poverty, while Fujimori’s stressed her father’s law and order legacy and open market-privatization push which risks alienating powerful labor groups. In Chile, worker wage demands have sent inflation to the same level, with the monetary authority lifting the benchmark to 5 percent from the previous near-zero rate under quantitative easing. Domestic demand is up 15 percent from the year-ago quake period, while copper-related inflows have resulted in record peso strength despite $4 billion already used for intervention. As an oil importer, fuel subsidies have caused a 1 percent of GDP fiscal deficit which may worsen with reconstruction spending.

Colombia’s sovereign investment grade return has brought decent cross-border bond and equity allocation according to fund monitors, as private foreign debt has almost doubled to $28 billion the past year. The Santos Administration predicts 5 percent GDP growth aided by likely imminent passage of a US free trade deal, as $20 million daily entry under an inherited smoothing program has not broken the peso’s rise. Flooding has lifted food prices, as the central bank’s progressive “normalization” leaves the policy rate at 4 percent. Mexico’s bourse has seen $400 million in outflows, although long-term Treasury bond commitments remain solid at $1 billion. The currency has soared past the 12 to the dollar barrier on historic international reserves of $125 billion supplemented by a 2-year $70 billion IMF flexible credit line. The government rejects resort to capital controls, and has imposed anti-monopoly penalties on phone magnate Slim. However auto production slipped in April on Japan’s supply disappearance and oil capacity is also dwindling as the next presidential election cycle approaches, with fiscal reform on hold as a bitter aftertaste to the current sweet spot.

Haiti’s Musical Chair Chafing
2011 May 16 by admin

Posted in: Latin America/Caribbean
Haitian musician Martelly was inaugurated as President after an outsize election victory despite slim turnout and declared the island “open for business” in his accompanying address as an historic first peaceful party transfer took place. However, as he names his government and attempts to introduce new laws and policies to reinvigorate immediate rebuilding and long-term anti-poverty efforts, his grouping is a minority in parliament and more forceful judicial review could also act as a check. As he entered office the IMF, which extended a $40 million adjustment loan as part of donors’ 2-year $5. 5 billion package, completed an initial assessment of program implementation which cited delays despite overall solid commitment and performance. Outside debt relief, less than one-third of the aid has been disbursed awaiting the poll results, and dedicated reconstruction has been “slow,” according to the document. GDP decline in fiscal year 2010 was 5 percent compared with the original 8. 5 percent estimate as agriculture stabilized, while inflation is over 7 percent on higher food and fuel costs which spurred riots under the Preval administration. The budget deficit excluding grants was 5 percent on better tax collection, and the current account gap also improved to 2. 5 percent of GDP as international reserves topped $1 billion. Since last September the currency has appreciated 5 percent, and private sector credit has increased by the same figure on good bank liquidity and profitability indicators. Retail petroleum costs were hiked 30 percent in March to reflect global trends without social unrest, although inflationary pressure and exchange rate softening could follow. Next year’s public investment spending for post-earthquake related and humanitarian purposes will be financed in part from the Petrocaribe loan arrangement with Venezuela, with $200 million still in the account after Caracas cancelled twice that amount in outstanding obligations.

The central bank will be repaid through special bond issuance for old finance ministry borrowing as Treasury bill and broader government securities markets take shape with outside technical assistance. Foreign exchange trading will also be modernized, and a law on monetary authority independence will be introduced by year-end. A medium-term debt strategy should be devised as non-concessional access evolves, and officials have already committed to overhauling the state electricity network to stem losses and prepare for a new Northern industrial park which has emerged as the main showpiece post-disaster venture. Land title and business registration reform are likewise on the priority list to move up in World Bank rankings as President Martelly presses to realize a campaign promise of moving voters into durable housing and jobs.

The EU’s Naked Derivatives Ambitions
2011 May 15 by admin

Posted in: Europe
French and German officials lauded the near-completion of rules limiting “naked” CDS positions, where the buyer does not own the underlying bond, which were originally blamed for magnifying Greece’s sovereign distress last year to compel unprecedented outside bilateral and multilateral credit lines. Subsequent investigations absolved the shorting technique as the main cause of double-digit Greek yields and long-term market access loss which have persisted amid continued private restructuring and official program expansion talk. The tools, which had been subject to temporary national bans, did not feature as prominently in the ensuing Irish and Portugal debt sagas, and US counterparts have argued that restrictions would undermine liquidity and standard business hedging. The European approach tends to presume a speculative bias and also affords less flexibility in moving permitted derivatives activity generally to mandatory clearinghouses. For foreign exchange trading in contrast Washington regulators have agreed to broad exemptions, while newer EU members in the East trying to develop and deepen futures and swap capability have questioned the balance between commercial growth and prudential stability. Transatlantic differences have likewise been pronounced in areas like securitization, credit ratings, compensation, and proprietary dealing. Brussels requires issuers to retain 5 percent of securitizations and strict disclosure. Ratings agency oversight has been transferred to the new European Securities Market Authority, which has proposed changing the issuer-pays model and opening competition to a broader range of industrial and emerging economy-based firms. Under the 2010 revised Capital Requirements Directive, banker bonuses must observe a detailed formula proportionate to salaries with provisions for up-front and deferred versions and claw-backs upon performance decline. With their traditional universal banking framework European supervisors do not subscribe to the so-called Volcker Rule, named after the former US Federal Reserve head, which seeks to circumscribe securities portfolio scope in affiliates. However in the stand-alone hedge fund and private equity sphere which New York and London-based managers dominate recently-added European Commission controls that cover valuation, leverage, marketing, and remuneration are much tougher than in other jurisdictions.

In accounting, in turn, the US GAAP is slowly converging with Europe-designed international practice that has spread to the wider G-2O group now debating a range of global system protection measures. The specific breakdown of capital and liquidity ratios under Basel III, too-big to fail designation and cross-border resolution methods, and creation of multilateral cooperation bodies beyond the IMF-located Financial Stability Board are among other issues where despite mutual solidarity pledges member countries and regions prefer to pursue their own naked interests.

Cyprus’ Daunting Greek Debt Divides
2011 May 12 by admin

Posted in: Europe
The Cyprus stock exchange and external bonds shuddered as Euro-zone authorities scrambled to salvage Greece’s unraveling rescue package agreed a year ago with missed fiscal targets and credit default swaps and 2-year market yields at ultra-distressed readings. The island heads into parliamentary elections with the economy “in grave risk,” according to the central bank head, following rating agency bank and sovereign downgrades during the first quarter on Greek public and private sector credit exposure and fiscal slippage. GDP growth was a meager 1 percent in 2010 after the double-digit tempo of the previous decade, as the budget deficit topped 5 percent and will again match that “worst-case scenario” range this year, in the words of the Finance Minister. Government debt is at the 60 percent of GDP Maastricht threshold, but excludes contingent liabilities at the two main listed financial groups Bank of Cyprus and Marfin whose capital could be erased with a sizeable haircut on Greek instruments and spike in nonperforming loans there. The sector as a whole has lines outstanding of $10 billion, equivalent to one-third of output, as of the end of last year, the BIS reports, with the stated capital/assets at 10 percent. To raise revenue and protect account-holders, the parliament recently approved a deposit tax to bring in $100 million and cushion potential system-support costs. Deposits are four times GDP, at almost EUR 70 billion, and have fallen in the past few months on the direct cross-Mediterranean fallout and as Russian offshore wealth is repatriated with booming commodities lifting currency and securities values at home. Nominally Cypriot firms have been among the largest foreign direct investors in Russia and Central Asia in recent years in transactions designed to avoid tax and ownership disclosure burdens.

Despite the extension of VAT to food purchases, the Q1 fiscal gap was over 1. 5 percent of GDP on a 50 percent jump in interest payments and additional aid to the state airline which is still banned from flying in northern Turkish airspace. Opposition parties blame corruption for spending overruns which have already caused the government to backtrack on promised 2010 civil servant salary increases. An overlooked issue in reunification talks is the dual currency, with the euro adopted in 2008 and the lira still circulating in Turkey’s zone. Istanbul has reportedly taken some tourism business from Cyprus and Athens with their troubles, although banks there are also in prudential sights for breakneck consumer and mortgage activity as the ruling party goes to the polls with a comfortable lead and a ticket of identified overheating discomforts.

Ecuador’s Raffish Referendum Riffs
2011 May 10 by admin

Posted in: Latin America/Caribbean
Ecuadorean President Correa notched another referendum win extending constitutional revisions with a judiciary to executive anti-crime power transfer and stripping of media ownership interests from family-run financial-industrial conglomerates. The law and order and anti-business elite moves were designed in part to restore his popularity after a brief military detention over wages and benefits challenged the regime before loyalists quashed any nascent insurrection. Democracy and press monitors claim the actions foster authoritarian tendencies, with the incumbent openly embracing neighboring Venezuela’s political-economic model. The stock exchanges in Quito and Guayaquil, which had lost MSCI frontier representation on scant trading, paused on the victory after a slight uptick through April, as momentum will likely carry over into proposed securities law changes to ensure that debt accounting for 95 percent of activity is backed by “real assets. ” Corporate issuers, which sold almost $600 million in paper in Q1 at an average 8 percent yield, would be unable to continue using securitized-income structures which are about one-quarter of the segment. Last year Nestle’s local unit completed such a headline offering, and exchange executives argue a ban would “break” the market, as they also try to advance plans to transform into for-profit operations. In March the president and his cabinet also met with investors and bank underwriters to broach the possibility of re-entering external bond markets after the 2009 default on “illegitimate” obligations from an earlier exchange. The residual risk premium on 2015 instruments has brought yields almost to double-digits, although performance this year has topped EMBI members. The public GDP growth forecast is 5 percent after only half that clip in 2010 on higher private consumption. The original budget with oil at $75 per barrel saw a slight deficit despite increased spending as new hydroelectric power supply eased fuel subsidies. The current account could return to surplus with better petroleum exports and remittances, and Chinese and multilateral lending continues to ensure capital inflows.

Venezuela’s President Chavez has slapped a 95 percent windfall tax on revenues above $100 per barrel as the fiscal shortfall persists and capital flight and import demand have sent foreign reserves below the “adequate” $25 billion level. Exchange controls have been tight with only $7 billion authorized for the private sector in Q1 as sovereign and state-oil company bond placement and trading remain the main dollar channels. The Finance Ministry’s $12 billion debt program for 2011 already absorbed half that amount for PDVSA as the government courts possible US commercial sanctions for its Iran and Libya dealings. As the president gears up for a re-election bid in 2012 he has shifted an unknown reserve sum to the social spending Fonden pool and also suspended IEA auditing of monthly oil output as intentions for the Andean duo evade transparency.

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The Arab World’s Toppled Regime Crush
2011 May 6 by admin

Posted in: MENA
The IIF in its annual survey placed the Mideast region at a “historic turning point” with economic and political transitions often working at cross-purposes and at different speeds. The group subdivides into GCC and non-Gulf oil exporters and importers including Egypt, Jordan, Morocco and Tunisia considered most at risk from prevailing cost and debt burdens absent urgent competitive reforms. On average they will experience slight recession this year as tourism and domestic and foreign investment plummet and nonperforming loan numbers mount. Their fixed-income and equity performance has suffered greatest, and the 4 percent GDP growth projected for 2012 is contingent on fading unrest. The Gulf countries are at the opposite end of the spectrum, with only Bahrain so far hit in output and financial market terms, although the likely oil and public spending-aided trajectory spans lackluster expansion in the UAE and Kuwait to a 6. 5 percent and almost 20 percent pace respectively in Saudi Arabia and Qatar. Private credit activity will be positive even in Dubai as it benefits from fund diversion elsewhere and a final DW debt rescheduling although other government-linked companies are still in negotiations. With the hydrocarbon price premium of recent months the Council members’ current account surplus will increase $100 billion to near $300 billion as overall foreign assets including in sovereign wealth pools reach $1. 7 trillion. Fiscal balances will be in the black at over 13 percent of GDP, while inflation will surpass 5 percent on generally rising commodity values. The petroleum buying countries in contrast will see large budget and balance of payments deficits which may require resort to bilateral and multilateral soft lending, with Egypt and Tunisia now in discussions over IMF and World Bank support. While CDS spreads have come in from peaks, the equity universe has taken sharp losses with foreign investors exiting en masse. However, forward exchange rates continue to reflect an intact dollar peg, although broader monetary union has been indefinitely shelved with the added geopolitical crisis.

The Arab geography has governance, unemployment, wealth distribution and business climate indicators lagging other developing market destinations, the survey comments. Private investment is below 15 percent of GDP with government dominance “undermining productive activity” such as manufacturing and services. Bahrain will see “no early resolution” as both onshore and offshore banking and the hospitality industry endure blows bringing economic growth to a decades-low. Egypt’s risks are “downside skewed” as the public debt/output ratio touches 75 percent and a second wave of social disruption may loom with a washout in tangible democratic and living standard improvements until next year.

Poland’s Omitted Error-Prone Preening
2011 May 2 by admin

Posted in: Europe
Polish securities were upended by
Hungarian ones as Central Europe favorites as Prime Minister Tusk’s Civic
Platform seeks another term with early reform ambitions unfulfilled and new
private pension and national account setbacks stoking investor doubts. The
government has barely budged in the World Bank’s “Doing Business” ranking since
taking office, and the non-public social security contribution was cut as a
portion of salaries by two-thirds to keep the debt below the 55 percent of GDP
ceiling that by law automatically triggers austerity measures. The fiscal
deficit will still exceed 5 percent this year under a best-case scenario, and
statistical integrity more broadly has been undermined by the discovery of a
near EUR 15 billion “errors and omissions” item in the balance of payments that
may double the officially-reported current account gap. The central bank has
acknowledged the large discrepancy, which it argues is due mainly to untracked
German car imports, but claims no net drag on output as domestic demand was
also understated under existing methodology. The fracas erupted as the capital
account has shifted to 75 percent reliance on portfolio inflows, and the
privatization program foresees $5 billion in upcoming Warsaw Exchange sales to
raise revenue and the regional and international commercial profile. A listed
Ukrainian firm was recently added to the blue-chip index under a longstanding
strategy to lure neighbors with initial outreach also to companies in culturally-related
Belarus
before the crackdown there following the President’s re-election. Another stake
in Bank PKO will also go on the block as the foreign-dominated sector has
maintained good earnings despite NPLs at close to 10 percent of the total. GDP
growth is put at 4 percent in 2011 on inflation at the same level, with the
benchmark rate already lifted slightly entering an expected tightening cycle.
Mortgage lending has been flat and consumer appetite has been hurt by higher
VAT as corporate and infrastructure credits have become the most popular
segments ahead of the Euro 2012 football competition.



The zloty has backtracked against
both the euro and dollar as almost $9 billion in external bond issuance, the biggest
among EMBIG components, is slated this year. The CDS spread with Hungary has
aligned as the latter successfully placed $4. 25 billion covering three-quarters
of annual needs after re-affirming the 3 percent of GDP budget deficit goal
through its own pension and tax grabs. To diversify the buyer base debt
managers in Budapest traveled to China in April as
a revised constitution was also expedited through parliament with the Fidesz
party majority over opposition and European watchdog objections. It enshrines a
50 percent of GDP public debt objective along with political influence over the
monetary authority as ingrained assumptions are recast.





Thailand’s Testy Temple Tiffs
2011 May 1 by admin

Posted in: Asia
Thai shares struggled to keep
Asia-leading status as the worst fighting in decades again erupted along the
Cambodia border over disputed temple ownership amid rumors the army action was
designed to interfere with upcoming elections which exiled former premier
Thaksin intends to contest through allied parties, as the incumbent Ahbisit
seeks coalition support to hang on to power. The UN appealed for calm and urged
that the spat be referred to outside arbitration. The government temporarily
closed activist radio stations under the pretext of state security in an effort
to ensure backing for the skirmish and avoid a repeat of last year’s bloody
anti-regime street protests over such policies. The move came as Japan’s
post-earthquake trade cutoff may begin to pinch, although exports were up 30
percent in March with ample current and capital account surpluses. 10 percent
of foreign sales go to Japan
with autos and electronics the top categories, and over half of external debt
is yen-denominated. Imports include machinery, plastics and steel, and likely
higher costs from the disaster’s supply squeeze combine with the oil price
spike from the Mideast crisis to dent the
balance of payments. In response to the energy burden the timetable for
slashing diesel subsidies has been postponed to the second half even as the
fiscal deficit could break the 4 percent target. It has also sent inflation
toward 3 percent which could bring a further series of central bank rate hikes.
The official stance is that neither near-term economic or political shifts
should change underlying currency direction which has recently been steady
against the dollar with occasional intervention on the back of re-institution
of the bond inflow tax.



However many private analysts
question the $20 billion expansion of overseas borrowing the past year, almost
half through the banking sector, which may have used the channel for forex
hedging as well as domestic credit availability. The amount was the largest
since the 1990s financial crisis, and companies have also tapped the lines
given the cheap greenback funding offered and difficulties in consummating
local capital markets transactions with uncertain IPO appetite and hefty
government paper issuance crowding the space. The GDP growth forecast remains
intact for 4-5 percent heading into the first “normal” election and post-crisis
rates cycles in years, although neither the prospect of unconventional
prudential or military measures can be dismissed with tenacious tensions.



Pakistan’s Packed Cabinet Purge Purse
2011 April 27 by admin

Posted in: Asia
Despite the spectacular bin Laden
assault, Pakistan shares continued their flat course as a cabinet reshuffle and
consolidation demanded by the opposition following the departure of the ruling
party’s coalition partner failed to ease political bickering and produce a
fiscal reform package needed to unlock the remainder of the IMF’s $11 billion
support program. The army had also recommended ministerial changes and
combinations to bolster anti-terror credentials and cost-cutting as defense
spending and the intersection of military-commercial links come under scrutiny.
The Fund had granted a nine-month extension to achieve compliance with tax
revenue and VAT introduction targets, as the current arrangement expires with a
heavy repayment schedule next year that has kept sovereign CDS at the
distressed threshold. The MQM group left the government in January after a fuel
subsidy cut designed to satisfy the criteria, but popular outcry and judicial
rulings questioning legality provoked immediate retreat. The last $3. 5 billion
chunk and new post-flood donor commitments which have been slow to materialize
are essential to bridging the fiscal deficit that will surpass 8 percent of GDP
as growth slumps to 2. 5 percent. The roughly $120 billion in debt at 75 percent
of national income is divided equally between domestic and external issuance,
with servicing costs above $3 billion in the past fiscal year with benchmark
interest rates and inflation in double-digits. This year’s rupee outlays have
been five times original projections as provisions in the fiscal responsibility
law were again breached. To diversify the buyer base, the central bank has
increasingly turned to sukuk auctions as Islamic banking assets are at 5
percent of the industry total. The balance of payments has skirted another
crisis on aid infusions, with the US approving a new 5-year $1. 5 billion annual
economic development pipeline, and record worker remittances mainly from the
Gulf region. International reserves are close to $18 billion as the currency
has steadied at 85 to the dollar.



Sri Lanka’s stock exchange has
shown the same trajectory as commercial sovereign debt and international
assistance plans are on hold after the UN filed a report accusing the
government of human rights abuses in the final civil war victory push against
Tamil rebels. The GDP growth forecast has been for another 8 percent on
tourism, infrastructure, agriculture and garment advances, and a new tax regime
went into effect that should help collection. The current account deficit has
widened however, and authorities continue currency intervention amid
incremental capital account liberalization. Both South Asian markets, despite
lackluster results, are far ahead of Bangladesh’s 30 percent loss as the bottom
frontier performer, as retail punters take to the streets to press for official
rescue with few remedies available in the cabinet

The Andes Climb’s Creaky Crevices
2011 April 20 by admin

Posted in: Latin America/Caribbean
Peru’s Q1 20 percent stock market
selloff worsened, with small bond foreign inflows also reversing, as populist
candidate Humala won the first round presidential contest with a slight lead
over second-place finisher Fujimori, with the business community’s preferred
choices Toledo and Kuczynski eliminated. The ruling center-right APRA party of
President Garcia, whose approval rating is 25 percent, did not even field a
contender. Humala’s opponents claim that with his platform of more equal wealth
distribution through a “national market economy” he remains allied to
Venezuela’s President Chavez, who campaigned on his behalf during the last
effort at the top post. The former army officer now portrays himself as a
moderate who will uphold current fiscal and monetary directions while
renegotiating international mining contracts, extending state pension coverage,
and changing the constitution. His law and order stance mirrors Fujimori’s who
serves in Congress and draws support from her father’s admirers recalling
privatization and anti-terror successes and downplaying subsequent corruption
charges and convictions. Toledo commanded a wide early margin but faded, with
the competitive reform initiative seized by longtime investment banker PPK, who
ultimately fell short as too old and
elite to appeal to young, poor and working class voters especially outside
Lima. Last year GDP growth was almost 9 percent with credit up 20 percent,
according to the central bank, which has intervened on both sides of the
exchange rate and introduced prudential restrictions on speculative positions.
The pre-election goal of achieving budget balance has been undermined by
additional food and fuel spending, with commodity inflation spurring
incremental interest rate upticks. The government has won good marks for
building infrastructure, in particular roads to remote rural destinations, but has
been in charge during a wave of killings associated with drug violence.



The country has supplanted
neighboring Colombia in the cocaine export standings, and in addition to
cross-border security implications, commercial ties are at risk with the poll
outcome with large cement and electricity investments. Chile’s LAN airline has its main hub in Lima, and the stock
exchanges between the three jurisdictions have joined in a formal alliance.
Colombian President Santos already has a packed diplomatic agenda agreeing to a
labor union treatment compromise to break the impasse over the US free trade agreement, and recently hosting a
summit in an attempt to reinvigorate links with Venezuela. One ratings agency has
restored investment grade status while record flooding continues to challenge
fiscal adjustment and anti-inflation mettle, with Andean topography still
defying surefire scaling.

Argentina’s Punishing Inflation
2011 April 20 by admin

Posted in: Latin America/Caribbean
Argentine stocks and bonds
extended losses on their respective MSCI and EMBI indices as IMF officials at
their spring conclave expressed doubt that the government would accept a
technical mission’s recommendations for a new inflation index. President
Fernandez, with a 60 percent approval rating heading into October elections
although her candidacy remains undeclared, reported a 10 percent number in
February while allowing a public sector wage hike of 25 percent, which outside
analysts cast as the true reading. However private consulting firms have become
more hesitant to challenge the official figure after they were ordered to
divulge their methodologies or face hefty fines. The pattern of commercial
interference has crossed into big companies where the state has a minority
stake through pension fund and other holdings following a directive that shares
will be actively voted. Steelmaker Siderar has taken the issue to court, but
the Finance Ministry asserts full legal authority to press its interests in the
same fashion that the social security portfolio is used for buying Treasury
debt. The central bank meanwhile with over $50 billion in foreign reserves
continues to manage the exchange rate at 4 to the dollar, and the commerce
department has introduced limits on automatic import license renewals, both in
an effort to boost the trade surplus. Strong commodity exports and
stimulus-induced domestic demand are due to deliver 6-7 percent GDP growth this
year after 2010’s almost double-digit clip. Record prices for soybeans, wheat
and flour sold abroad have combined with a 30 percent rise in infrastructure
spending at home to bring a consumption boom that has also been accompanied by
a physical cash squeeze and mounting law and order problems. Security is likely
to feature alongside economic policy as a prominent element in the presidential
campaign and has already been raised by the Radical Party standard-bearer
Alfonsin. Within the Peronist grouping President Fernandez may be challenged on
these fronts for the nomination, but a potential rival provincial governor has
demurred after accusations of vote-rigging.



As a G-20 member, Argentine
representatives continued Paris Club debt renegotiations at the Washington
meetings, but their reduction and payback period demands have been rebuffed by
counterparts. An eventual deal may be complicated by the political uncertainty
of the polling period, and any attempt to resume sovereign bond issuance will
too likely be deferred into next year. The provinces and corporates together
have tapped external markets for $5 billion since 2010’s reopened exchange,
with non-participating foreign creditors still moving to attach assets. However
data trackers report sustained overseas inflows into local inflation-adjusted
debt which offer high yields even if
confidence in the measure is at the opposite extreme.

India’s Crossed Anti-Corruption Communications
2011 April 20 by admin

Posted in: Asia
Indian shares were off 6 percent
through the first four months, at the bottom of the major Asian pack, as the
trial of the former telecoms minister began who is accused of shortchanging the
state of $40 billion in revenue through crooked license awards. Several
high-profile officials and business executives have been ensnared by the court
proceedings the Singh administration has cited as an example of its “no
tolerance” anti-graft stance. Big listed family groups like Tata have
criticized his team for poor regulation and public services, and a slow reform
pace after unveiling an ambitious agenda upon re-election. It has concentrated
on overseas as opposed to domestic expansion, and warned of wide-scale social unrest
in the wake of the phone and other scandals. The financial sector may soon
liberalize private insurance and pension fund segments, but local elections
scheduled in the coming months may reveal the depth of the ruling coalition’s
unpopularity and compel Congress Party leader Gandhi to tap another prime
minister. The federal government in April moved to assuage foreign direct
investors by ending repeat approval requirements for new commercial units after
initial establishment. The last fiscal year these inflows were $22 billion
compared to the previous annual $38 billion total. British companies are
embroiled in a series of tax and environmental disputes which UK Prime Minister
Cameron raised during a recent bilateral trade visit. On the portfolio side, outflows
have replaced 2010’s record allocation despite increases in FII ceilings and
domestic mutual fund opening to retail subscription in the latest budget. Asset
manager stocks immediately jumped on the announcement, but the securities
supervisor SEBI still has to draft rules for entry, and cross-border clashes
may result from different commission and customer verification approaches. The
vehicles must also vie with the spread of dedicated ETFs in the US, Europe and Asia
that already enable ready access.



The other regional “I,” giant
Indonesia, has tried to present itself as a compelling alternative and was
further motivated as the original BRIC club formally added South Africa as its
first new member. It advocated for an investment-grade rating at the recent
G-20 Washington gathering, and the central bank pointed out that international
holdings of its bonds were again at one-third the amount outstanding despite
the imposition of short-term maturity limits. A secondary bank reserve
set-aside also went into effect in March, although the benchmark interest rate
was maintained as inflation hovered at 6. 5 percent and fuel subsidy removal was
postponed. In external accounts, coal, natural gas and palm oil exports have
soared, although on the flip side payment and repatriation transfers also
increased to an unprecedented $20 billion last year signaling mixed
communications.

Nigeria’s Stymied Goodluck Streak
2011 April 20 by admin

Posted in: Africa
Nigeria’s share gauge battled for
positive status after consecutive parliamentary and presidential elections
which encountered delays and geographic-religious strife after Delta Southerner
Goodluck Jonathan handily won a full term as chief executive. He will continue
in office as oil prices are almost double the $65/barrel plugged into the
budget, with an industry modernization package which was enacted the past year
high on the immediate implementation agenda. The regime aims to align treatment
of longstanding Western multinationals subject to recent tax and royalty
increases with new deals struck with Chinese counterparts that have offered
large infrastructure building programs in exchange for favorable terms. Bank
cleanup has also featured with the central asset management agency issuing its
first public bonds to cover bad loan resolution. Templeton’s emerging markets
team also picked banks as a top frontier pick with valuations in single-digits.
On the debt side, following an inaugural sovereign placement, foreign reserves
and the naira have been steady, although regular intervention is designed to
keep it in the 150/dollar range. As the level stabilizes, authorities may
expand overseas access to domestic government bonds as they work with donor
technical assistance on modernization plans.



Adjacent Ghana has progressively
opened across the fixed-income spectrum and the stock market was up 20 percent through
the first four months as the IMF predicts GDP growth will double last year’s 6
percent with the start of offshore oil production. However it also cautioned on
budget and inflation outlooks, and on preserving post-HIPC external debt
sustainability as another sovereign flotation is considered. Kenya too has
gotten legislative approval for a maiden effort as it has pushed the average
local maturities to over 5 years with double-digit coupons to compensate for 9
percent inflation as of March. A poor rainy season, and Hague Tribunal
indictments against ministers for alleged crimes during the 2008 tribal
bloodbath, have dented equity sentiment, with the bourse off 12 percent through
April.