No More Learning

Corporate and sovereign spreads at now at a premium to comparable US asset classes and the forward p/e ratio at 11 is at an historic discount to mature markets’ 15 also presenting a valuation case although energy company earnings have further to drop. These plays can be easily accessed by dedicated ETFs routinely employed by 20 percent of long-term insurance and pension funds, statistics show.

Bank lending has also skidded since mid-2014 with Europe off sharpest as Asia’s overseas liabilities, half of the total and concentrated in China more than doubled in five years to $1. 7 trillion. Latin American facilities also jumped for the period, led by Brazil, Colombia and Peru, as Middle East and South African ones languished. Turkey was Europe’s exception with flows rising to over 10 percent of GDP and increasingly from US banks. Frontier market reversal has been prominent into 2015 with the MSCI index negative and bond yields spiking as portfolio and direct investment were unchanged last year at almost $150 billion. Only Asian components are relatively stable while twin deficit and commodity-export countries in EMEA will be “tested” by less adventurous spirits, the study comments.

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The World Bank’s Space Exploration Modules
2015 January 26 by admin

Posted in: General Emerging Markets
The World Bank’s Global Economic Prospects publication predicted another developing region year of below 5 percent GDP growth despite global stimulus and the chance to open “fiscal space” by further reducing endemic fuel subsidies. It postulated tighter external financing conditions which could erode record runs of sovereign issuance increasingly from poorer countries and corporate access from Chinese developers and other borrowers facing domestic credit constraints. East European currencies will continue to be whipsawed by Eurozone and Russia-Ukraine conflict developments and commodity prices in agriculture and metals will also be “soft” through the medium term in part due to the stronger dollar effect. For most oil exporters current values are under budget breakeven levels but large accumulated asset and reserve pools can cushion the blow. World trade continues to increase marginally with new supply chains, import demand compression and export credit scarcity, the Bank believes. “Disappointing” 2014 GDP growth at 4. 5 percent was due to terms of trade, policy confidence and monetary shifts across emerging and frontier economies, with fiscal deficits particularly high in the latter covered by debut bonds as government debt doubled post-crisis from 30 to 60 percent of GDP. Inflation has vacillated and was above target in Brazil and Turkey as Hungary and neighbors entered deflation. Double-digit unemployment has festered in the Middle East/North Africa and big Asian and European markets are experiencing population and productivity slowdown. Low income countries in Africa and elsewhere averaged 6 percent growth but often rely on remittances to aid domestic consumption which fell to CIS recipients from Russia. To cut global poverty as defined by $1. 25 daily income will require sustained 4 percent output expansion as the Millennium Development Goals are reviewed at an upcoming UN conference. Average developing country bond maturity has lengthened since 2008 and approaches 10 years for Latin American corporates but foreign ownership of local government paper is often at 20-30 percent in major markets. “Disorderly unwinding” of China’s debt buildup is a small probability with budget and international reserve capacity and bank and capital controls but 5 percent decline in the 40 percent fixed investment rate would shave half a point from global activity. The Ebola epidemic may cost West Africa from $3-30 billion depending on containment progress but the tax revenue and health system implications will last beyond the outbreak course as cross-border commercial and travel patterns are also interrupted.

The report urges China to continue its campaign against shadow banking and implement other changes from a 2013 blueprint including deposit insurance and municipal bond development. For the emerging world it expects more accommodative monetary steps with attention to foreign currency risks but doubts the ability to conduct countercyclical fiscal policy as in the recent past with primary balances in three-quarters of international capital market-access members below the stability threshold. Structural reform priorities include better licensing, tax, customs and judicial practice as well as bottleneck removal in the infrastructure space, the Bank concludes.

Central Europe’s Mortgage Mortification Moral
2015 January 26 by admin

Posted in: Europe
Central European currencies and stock markets reeled with the Swiss National Bank’s surrender of the multi-year euro-franc ceiling reviving mortgage worry that had faded since the decision. In Poland total CHF debt is over 9 percent of GDP, with household borrowers representing 7. 5 percent, and the opposition Law and Justice Party noting Hungary’s populist schemes has campaigned on a reduction platform which may now be more fully embraced with the sudden consumption and debt-servicing blow to the economy. Domestic demand continues to be the main driver of 3 percent GDP growth and should be helped by lower oil prices and EU projects, but with deflation the central bank was expected to cut rates before the Swiss franc surprise. The fiscal deficit was due to exit Brussels’ excess procedure near-term as public debt dropped to 45 percent of GDP with private pension Treasury bond cancellation. Exports have collapsed to Russia and Ukraine but a small current account surplus is projected and direct and portfolio investment inflows remain positive bolstered by a 2-year $22 billion flexible credit line. The backstop has offered non-residents comfort to retain 40 percent of local debt, but may not be tapped just for mortgage refinancing. Hungary escaped the worst with the recent EUR 15 billion conversion under November market rates allowing a 25 percent external debt drop through 2018, despite EUR 1 billion in continued bank funding retrenchment. The loan/deposit ratio is down to 100 percent and the one-quarter NPL ratio for foreign currency mortgages should ease to foster 2. 5 percent consumption-led growth this year. With negative inflation the central banks should again lower rates as the budget gap meets the 3 percent of GDP Maastricht target. A few big foreign investors like Templeton have held positions but the overseas share of domestic debt has been trimmed with public liabilities still at 80 percent of output and unchanged post-crisis. With the mortgage escape main listed bank OTP was buoyed but it still has losing operations in Russia and Ukraine as the MSCI index crumpled 35 percent on an annual basis. Czech shares also slid double digits as it moved toward a minor current account deficit on 2. 5 percent growth and no inflation, but the euro-koruna cap came under scrutiny with the Swiss ready abandonment. Officials maintain that the regime will last through 2016 unless price raises suddenly attain the 2 percent goal and the hodge-podge ruling coalition without a common monetary view is unlikely to advocate for immediate change, analysts believe.

Romania stocks were caught in the maelstrom with a 30 percent annual loss after the central bank earlier eased reserve requirement for FX liabilities with lending off 10 percent in 2014. President Johannis, an ethnic German from the opposition party, took office with a pledge to press hundreds of corruption cases as EU and IMF missions endorsed the 2015 budget as the latest program tries to avoid repossession after delinquency.

India’s Lashed Lazy Habits
2015 January 20 by admin

Posted in: Asia
Indian stocks after a 2014 20 percent MSCI gain on record $15 billion foreign investor inflows sold off as the parliamentary session ended without passage of tax, land and insurance reforms, although prime minister Modi used his decree power for temporary approval before the body reconvenes in several months. The measures blocked by the upper house where the ruling BJP coalition is a minority would introduce a national VAT levy, lift international life and non-life participation from 25 percent to 49 percent, and ease consent and compensation rules for rural infrastructure development. To build momentum for another push the economic team is pressing initiatives to promote manufacturing and reduce “lazy banking” in Modi’s words though $25 billion in partial state lender divestitures, around half of estimated system recapitalization needs to meet new standards and handle the true 10 percent-plus NPL total. He hinted at senior management changes and promised less government interference in operations to accompany the transactions. In manufacturing the charge is led by a technocrat formerly with consultants McKinsey and aims to double its current 15 percent share of GDP to lift 5 percent growth. The China and East Asia model will be shunned in favor of “bottom-up innovation” for emerging industries like solar. The Power Ministry will support $250 billion in renewable energy projects through end-decade under the plan which also allocates $100 billion for rail and transport to encourage spinoffs and eliminate bottlenecks. Chief economic adviser Subramanian, recruited from the Peterson Institute in Washington, may advocate looser fiscal policy for the drive as the central bank monetary stance may also relax with the latest 5 percent consumer inflation reading. However rupee weakness ,the persistent current account deficit and privatization glitches as with the resumed Coal India attempt facing worker protests may delay such moves as the administration has also been busy with overseas engagement. At the WTO it allowed a trade facilitation pact to proceed after initial scuttling and a high-level dialogue was recently held with the US with Secretary of State Kerry lauding progress in the prime minister’s home state of Gujarat.

Traditional close ties with Sri Lanka may in turn be restored after the surprise 51-49 percent defeat of two-term President Rajapaska by opposition alliance candidate Sirisena, his former Defense Minister who led the final anti-Tamil rebel campaign in the decades-long civil war. The regime had cultivated $5 billion in Chinese loans and commitments post-conflict with a $500 million container port just completed with a nearby $1. 5 billon reclamation project underway. Reconstruction, tourism and agriculture underpin 7 percent growth, and despite high fiscal and current account deficits and the absence of an IMF program consecutive sovereign bond issues were oversubscribed. The incoming President drew backing from an anti-incumbent wave of groups and parties without a common agenda but he vows to reverse the post’s authoritarian bent and investigate the Chinese ventures for possible corruption. After a 15 percent MSCI climb last year the stock market surged on opposition victory, as UN human rights investigators continue to delve into alleged habitual abuses in his old capacity.

Fund Outflows’ Anguished Encore
2015 January 20 by admin

Posted in: Fund Flows
EPFR’s 2014 fund numbers tallied another year of $25 billion equity outflows in almost all regional and thematic categories, while the bond exit was cut two-thirds to $8 billion with hard currency improvement. The poor showing culminated in record December damage according to the IIF’s monthly portfolio tracker. All stock regions—global, Asia, Latin America and EMEA—were negative, with Russian selloff throughout the complex account for over half the total. India had a $4. 5 billion standout gain with China and Greater China together off $9 billion. Mexican losses close to $3 billion were five times Brazil’s, as Europe and Africa were down $3 billion and $250 million respectively. By acronym groups BRICS, CIVETS and MIST were in the red an average $2 billion, while the generic frontier strategy had the lone inflow at $1. 5 billion. Developed market equities took in $185 billion in comparison last year, with $85 billion and $15 billion separately to the US and Japan. By overall sector commodities and precious metals had $15 billion in net redemptions, while energy and healthcare were the big winners at $40 billion between them. In bonds external sovereign and corporate funds managed a $4 billion influx offset by almost $12 billion in local currency flight. By country Brazil China and Russia vehicles suffered the most as Asia-Pacific was the laggard in industrial markets receiving $150 billion in total. The better fixed-income allocation was reflected in benchmark index performance with the EMBI Global Diversified up 7. 5 percent and the CEMBI 3. 5 percent, against the GBI-EM domestic gauge sliding 5. 5 percent in dollar terms. Sell-side houses predict low single-digit advances in 2015 as US Treasury strength wanes and commitments from institutional investors not captured in fund data resume at $20 billion-plus. Combined sovereign and corporate gross issuance should again near $500 billion, as they maintain average investment-grade ratings despite another year of 4 percent GDP growth just 1. 5 percent above advanced economies. With quantitative easing forecast for both the Eurozone and Japan to counter Fed rollback, the yield differential should remain around 6 percent for emerging markets although most will either reduce or keep on hold their own interest rates.

The MSCI core index fell 4. 5 percent for the year and the frontier one rose 3 percent but most countries were down in the two measures. Asia led the main pack with double-digit spurts in India, Indonesia, the Philippines and Thailand while in Latin America just Peru and in Europe Turkey were ahead. Egypt topped the list (+25 percent) but Gulf graduates UAE and Qatar faded in the homestretch for more modest performance. Sub-Sahara Africa plunged 15 percent on its sub-index with Kenya (+20 percent) the outlier. Central Europe’s decline was equal as Estonia’s was double at almost 35 percent. Bangladesh was the pacesetter (+45 percent) and Argentina was up over 15 percent as the lone Latin America representative alongside Trinidad and Tobago’s 9 percent despite the onset of energy export anguish.

China Property Developers’ Foundation Cracks
2015 January 15 by admin

Posted in: Asia
Chinese real estate company Kaisa with $2. 5 billion in offshore debt failed to repay loans and bonds as its Hong Kong stock market listing was suspended and its credit rating placed at selective default. According to Dealogic, the sector issued $40 billion the past two years as the mainstay of the high-yield space where spreads have spurted to 1000 basis points over Treasuries for a loss so far in 2015. The builder’s short-term notes have tumbled to 25 cents on the dollar and follow falls last year by Agile and Glorious Property as executives were accused of mismanagement on below-target sales. Bond prices have held up in contrast for industry leaders Vanke and Wanda despite price declines in almost all the 40 cities tracked as local governments removed curbs and the central bank tweaked reserve requirements to allow more commercial and residential lending. Asia’s projected corporate default rate may be raised from the low single digits with the mainland troubles that may not spare even the state oil giant placing $15 billon abroad since 2009 as it confronts a revenue squeeze. The BIS has noted the outsize presence of both China and Brazil in over $1 trillion in dollar issuance over the period, and pointed to the danger of currency mismatches as the renimbi marginally weakens. It believes the amount may be understated with frequent use of offshore vehicles hiding nationality and misclassifying the investment as direct rather than portfolio as funds are sent to headquarters from affiliates. Emerging market corporates raised $370 billion in 675 deals in 2014 by Dealogic figures with Asia accounting for half. Chinese borrowers with $215 billion are ahead post-crisis, followed by Brazilian ($190 billion) and Russian ($125 billion) ones with economic slowdown and softer currencies in store for the trio. The CEMBI universe must meet $100 billion in maturities and $85 billion in coupons this year, sources estimate, a jump from 2014 when the index returned 3. 5 percent and dedicated fund inflows were resilient unlike sovereign counterparts. Participants cited continued buoyancy in primary markets but noted meager secondary trading without dealing capacity in view of asset class priority and regulatory restrictions through Dodd-Frank and Basel III provisions. The IIF completed a recent study of general EM debt market-maker erosion since 2000 finding an 85 percent volume and 50 percent trade size drop in proportional terms along with wider bid-ask margins.

The World Bank joined the chorus of private sector debt concern in charting a 40 percent recent household and corporate rise in its January Global Economic Prospects update. For sovereigns it offered a series of threshold indicators for caution such as external debt/GDP in the 30-50 percent range and 135 percent for short-term obligations/reserves. Most developing counties were not an imminent risk but often flashed warnings with the measures, which will always be cast within the global market structure on near-term shifting ground, the Bank suggests.

Credit Ratings’ Consoling Convergence Conniptions
2015 January 15 by admin

Posted in: General Emerging Markets
In a mixed ratings gaze, index provider JP Morgan acknowledged emerging-developed market convergence “halt” with corporate and sovereign downgrades again topping upgrades last year, but doubted that heavy weight counties would soon lose their investment-grade position as the average in the main local and external benchmarks. One-quarter of global ratings are now BBB, and developed world upgrades in 2014 were quadruple downgrades while the respective developing economy numbers were 15 and 40 and negative outlooks are twice positive ones. Mexico, Peru, Latvia and Lithuania were among the winners as the EMEA region was most demoted including Ukraine, Ghana and Serbia while Latin America marks fell in Argentina, Venezuela and Costa Rica, and Asia’s only victim was Mongolia. Brazil, South Africa and Turkey are likely to retain prime status in the near-term, but Russia is a “migration risk” as S&P already placed it on negative credit watch implying 50 percent odds of a cut in the next quarter. Commodity exporters and speculative frontier country issuers may also be re-evaluated including Barbados, El Salvador, Nigeria and Zambia, while upgrade candidates are just a handful and not unanimous among the three agency giants. In the Eurozone France has a negative outlook and Italy could go to BBB, but few 2015 actions are expected despite the return of regional stress associated with the Greek elections and its Troika program exit. In the corporate realm the upgrade/downgrade ratio was 0. 6 with Asia and the Middle East-Africa outperforming Eastern Europe and Latin America with an average of 50 reductions in each area. Companies from Colombia, the Philippines and Vietnam went in the other direction, and South Africa had almost 10 downgrades with electricity provider Eskom teetering on junk status despite state budget injections. The high-yield segment has been hit harder including Chinese property and metals, Brazilian infrastructure and Russian consumer goods. In Latin America quasi-sovereign oil and gas names will probably be rerated, along with banks heavily exposed to the industry.

According to the analysis the EMBIG diversified with its one-fifth frontier component could be first to dip below investment grade with ten countries currently on negative outlook/review by Moody’s and S&P. Lebanon is on the list with its 150 percent of GDP debt burden and annual 30 percent public financing needs due to rise with internal and external political instability. Lower energy prices may help selected importers in jeopardy but have triggered broad re-assessment of Gulf credits after regaining their footing after the Arab Spring and Dubai restructuring. Saudi Arabia has an estimated $750 billion in foreign assets but will run a 2015 fiscal deficit and plans to issue domestic debt to bridge it. Dubai World has postponed upcoming maturities with another proposed bank and bondholder deal after the original backstop was extended by Abu Dhabi at peak world oil values. Bahrain which was the worst MSCI equity market in 2014 with a 35 percent loss could see its fortunes diverge further with allies’ diminished support supplementing sectarian splits.



Haiti’s Resigned Rebuilding Retreat
2015 January 13 by admin

Posted in: Latin America/Caribbean
The Prime Minister resigned amid continuing election standoff as the IMF emphasized “downside risks” in its last program installment on the fifth anniversary of Haiti’s epic earthquake. The US and other major donors dispatched envoys to urge holding of long-delayed parliamentary polls before President Martelly’s term expires later this year as he tapped a former mayor as the PM’s interim replacement. The government reshuffling accompanied 2014’s 3. 5 percent GDP growth and 5 percent inflation with slowing clothing exports and 5 percent currency depreciation. Both the fiscal and current account deficits over 5 percent of GDP were mainly funded by Venezuela’s Petrocaribe inflows along with remittances and government bank deposits. The central bank raised the gourde reserve ratio to 37 percent and the benchmark bond rate 200 basis points, but the tightening may have encouraged dollarization as annual lending growth fell to single digits on NPLs at 3 percent. The international oil price drip aids the terms of trade but could curtail Petro Caribe lines at 3 percent of output thus requiring further changes in the loss-making state-run electric company, the Fund cautions. In 2015 growth may slip slightly but the budget gap may narrow on higher tax revenue at 15 percent of GDP. Domestic debt service will increase to clear arrears and Treasury bill issuance will go toward paying a civil servant wage hike. On utilities the fuel subsidy burden should ease with lower global prices but progress has been slow in modernizing the sole hydroelectric plant with Inter-American Development bank support. International reserves just over $1 billion meet fourth months’ imports but future currency intervention should more selective, according to the final program report. Financial intermediation is constrained by the stiff reserve requirements and related party credit is another weakness. Preferential US trade legislation can be better tapped with infrastructure and skills improvement, and investors are also deterred by poor economic statistics which could be a focus of future assistance. While progress since 2010 has been satisfactory “continued fragility” has stifled reform and fiscal consolidation is still at an early stage and could be pressing with Venezuela’s aid withdrawal, the Fund admonishes.

The Dominican Republic sharing the island managed good growth and tourism performance and Jamaica rounded out frontier Caribbean sovereign bond success with decent adherence to its IMF rescue plan. They diverted interest from Ecuador after it was dropped from the EMBI and the rest of the Andean group on commodity and currency setbacks. Their corporates however experienced spread widening as Latin high-yield names began 2015 with defaults. A Brazilian construction firm caught in the Petrobras and Olympics construction scandals went into restructuring as a holdout fund spearheading Argentina litigation served notice on the state giant it was in violation of covenant terms without audited financial statements. The CDS premium jumped on the filing as the derivative joins Mexico’s Pemex and Venezuela’s PDVSA in popular refuge from oil spills.

Georgia’s Invasion Pretext Preamble
2015 January 13 by admin

Posted in: Europe
Frontier bond investors marked the first anniversary of Russia’s fight with Ukraine by recalling the fate of Georgia now a laggard in JP Morgan’s NEXGEM index, where 2014’s 10 percent advance was double the main EMBI and at the opposite extreme of the local currency index’s negative performance. That military incursion was just before the global financial crisis and spawned a range of post-conflict programs with the EU and multilateral partners, with the latest 3-year $150 million IMF standby in effect for six months. GDP growth should again be 5 percent in 2015 with “limited” Russian trade and remittance links, the Fund predicts. Inflation may also rise to 5 percent with food price and currency depreciation influence with the lari down close to 10 percent against the dollar. Annual 20 percent credit expansion, heavily concentrated in real estate, has also stoked the money supply. Fiscal policy aims to meet Brussels’ 3 percent of GDP deficit target after a free trade agreement was signed with a lengthy adjustment period. External accounts are a “concern” with the 10 percent current account hole and external debt at 85 percent of output. The banking system in turn remains 60 percent dollarized and relies 15 percent on non-resident deposits, one tenth Russian, according to a recent financial sector analysis. The 2008 shocks precipitated a liquidity squeeze and one-fifth the system deposit flight as holdings were switched into cash. Banks were closed briefly and the central bank suspended reserve ratios and provided uncollateralized loans. European parent helped local units meet foreign debt payments as international financial institutions extended aid. Cyclical recovery began in 2010 to partially restore health, but large foreign exchange and property exposures persist that call for stricter monitoring in view of regional geopolitical and Eurozone events, the IMF advises. Elsewhere in the Caucuses Armenia issued an inaugural sovereign bond last year on “subdued” 2. 5 percent growth from lower exports and remittances, according to the Fund’s December Article IV report. Inflation will revert to 5 percent with dram depreciation requiring central bank intervention against “disorder” and an overnight interest rate hike above 20 percent. Banks’ NPL ratio has risen from 6. 5 percent, but modest public debt at 45 percent of GDP has helped stabilize the thinly-traded bonds. Higher FDI in agriculture and tourism goes to offset the current account shortfall, but competitive and regulatory reforms have stalled, the survey notes.

Ukraine’s original $17 billion package has been delayed pending new government formation and budget adoption, and an additional $15 billion was requested by the prime minister. International reserves are at a decade low under $10 billion and the currency has halved against the dollar. External debt repayment before energy imports is $7 billion in 2015, with short-term bond yields at 30 percent. Bank liquidation and default has spread along with the conflict toll demanding $5 billion in defense outlays and stripping the fiscal austerity pretext.

Tunisia’s Establishment Tribute Tangle
2015 January 9 by admin

Posted in: MENA
Tunisian shares showed relief after the second round presidential contest was won by the secular coalition candidate who served in the waning days of the Ben Ali regime three years ago as his opponent first contested and then endorsed the 10 percent margin outcome. Government formation will likely entail an Islamic party alliance as the focus turns again to the “challenging” economic agenda after IMF program targets on bank restructuring and investment overhaul were missed according to the latest review. With 30 percent youth unemployment GDP growth will finish 2014 at just 2. 5 percent with inflation double that number. Fiscal and current account deficits are at 7 percent of GDP and could be aggravated by further social unrest and spillovers from the Libya and Eurozone crises. Lower oil prices should aid incrementally but the budget remains saddled with a subsidy range and costly civil service. Domestic bonds have absorbed the slack from official lending delays and 2015 borrowing envisions a return to external commercial markets without guarantees with the 50 percent of output debt level considered manageable. Interest rates have gone up but are negative in real terms as the central bank continues to inject liquidity to support state-owned banks with 15 percent average NPL ratios. It has reduced currency intervention with a crawling peg in place and net international reserves just above three months imports at $5 billion, with the Fund putting overvaluation at 5-10 percent and criticizing proposals to impose temporary trade controls. Regulatory forbearance for public banks will extend to mid-2015 as private shareholders object to management and recapitalization plans. A central asset disposal arm will handle bad loans one-third from the vital tourism industry as an overall resolution and deposit insurance scheme is finalized. The new parliament will debate a full package of business reforms on bankruptcy, competition, and labor treatment and the ailing pension system must also be tackled, the report advises. Next year Eurobond and sukuk issuance is put at $600 million, but security risks at home and next door in Libya loom large it warns.

In contrast Maghreb neighbor Morocco has stressed the lack of terror threats despite its longtime occupation of the Western Sahara in defiance of the UN. Officials have touted the relative safe haven status in regular trips to financial capitals, as Gulf aid continues to pour in with the comfort of a Fund precautionary line. The King still holds power with legislative consent and has managed faster pension and subsidy changes than Arab Spring peers. Banks have increased penetration to two-thirds the population as the benchmark rate was just cut to 2. 5 percent, the same as the post-crisis GDP growth norm. Moroccan bonds have been firm with the global oil price plunge, as opposed to GCC conventional and sharia-compliant ones bringing losses. Bahrain and Oman paper has suffered in particular, and Saudi Arabia’s ratings outlook was downgraded despite the stock market upswing seen with foreign investor invitation.

The Eurasia Union’s Loutish Launch
2015 January 9 by admin

Posted in: Europe
Russia reversed runaway ruble depreciation with improvised emergency measures at year-end as the Eurasian Economic Union went into effect with core ally Belarus insisting on trade in dollars as it doubled interest rates to 50 percent and imposed a 30 percent tax on foreign currency buying. Its rouble reached a 15-year low as President Lukashenko sacked the central bank head and prime minister in response and then banned informal dealing and ordered exporters to surrender half of sales. The latter’s replacement was presidential chief of staff and former Ambassador to Russia and has hosted talks in the capital Minsk to end the Ukraine conflict. West European banks have arranged loans and bond issues despite Lukashenko’s condemnation for anti-democratic practices as he faces re-election next year. The IMF for its part has resumed relations short of a formal program and urged thorough banking, monetary policy and structural reforms to avoid another post-2008 like collapse. The biggest union country Kazakhstan has thus far spurned capital controls and devaluation as the tenge hit a 2. 5 to the ruble high in mid-December while keeping within the 185 to the dollar corridor in place since early 2014. However the crash in the price of oil which accounts for 60 percent of exports has prompted large central bank interventions as banks were instructed to repatriate assets bringing reserves close to $30 billion apart from the sovereign wealth fund’s $75 billion. GDP growth is due to slip to 3 percent in 2015 with the petroleum contribution previously in trouble from delays with the Kashagan field, as President Nazarbaev unveiled a multi-billion dollar pipeline of infrastructure and stimulus spending with support from multilateral lenders which narrowed the MSCI stock market index’s double-digit loss. The IMF in its December Article IV visit recommended more exchange rate flexibility and bank cleanup to achieve the medium-term 10 percent NPL ratio goal. It cited business climate priorities ahead of desired WTO accession as it diversifies commercial partners into East Asia and the Persian Gulf. Neighboring Kyrgyzstan also bowed to pressure on its currency peg with the ruble’s meltdown and shut private exchange bureaus as mining export values likewise plunged. The move raised fears of reversion to authoritarian rule after open elections were held with former Communists still holding power and struggling to honor an IMF anti-poverty arrangement.

Moscow went into the month-long winter holiday with a raft of initiatives designed to aid the currency and banking system, which experienced its first rescue with a $2. 5 billion operation for mid-size Trust Bank. The government will inject fresh capital into state banks as regulatory leniency was granted on mark-to-market and loan impairment standards. Additional foreign exchange and debt refinancing facilities were offered, and commodity exporters were instructed to relinquish proceeds. The 17 percent benchmark rate has lured back deposits but households particularly with hard currency mortgage debt remain united that recession and double-digit inflation next year will test preferences.
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Mexico’s Muffled Missing Student Instruction
2015 January 7 by admin

Posted in: Latin America/Caribbean
Mexican bonds and stocks ended 2014 with losses as President Pena Nieto on his second anniversary in office two decades after the Tequila crisis flailed in dealing with suspected drug gang student murders and lower oil price fallout, as the Finance Minister joined his wife in receiving favorable housing terms from the same Hidalgo group winning government contracts. Economic growth came to 2 percent on 4 percent inflation as the central bank stayed its ground but reintroduced a $200 million daily foreign exchange auction when the peso fluctuates 1. 5 percent against the dollar as forward prices projected a 15 handle. Next year’s petroleum export value has been protected through hedges as the first round of Pemex private company bidding was opened to lukewarm reception which could affect future fiscal plans. The deficit could go to 4 percent of GDP without expected investment in view of infrastructure spending and tax reform has already kicked in to dampen business and consumer sentiment. Pemex’s streamlining has also encountered trouble as senior executives and labor unions question procurement and safety rules. Opposition parties supporting the original pact have reverted to traditional petulance scuttling prospects for new security force legislation in the wake of the student killings which would allow federal takeover of state police. Foreign direct and portfolio inflows have halved compared with 2013 but manufacturing exports have helped absorb the slack on strong US demand. Brazil’s 20 percent MSCI tumble has been worse as 2015 growth will be barely positive on weak Chinese commodities appetite and domestic consumption hit by higher interest rates after another 50 basis point hike and a 1 percent of GDP fiscal adjustment under incoming Finance Minister Levy to restore confidence. The subsidized borrowing cost offered by development lender BNDES has already been increased but the popular Bolsa Familia social program will remain untouched, according to officials. Central bank head Tombini was kept in the post and the currency swap intervention regime will be extended although the real is due to suffer from broad emerging market aversion and the record 4 percent of output current account gap.

Ratings agencies have postponed a sovereign junk demotion with the second term initiatives but gross public debt has jumped to 60 percent of GDP and Petrobras’ quasi-sovereign fate hangs in the balance after it again delayed audit results leaving three month before bond covenant breach is declared. New York ADR buyers have already filed class action lawsuits alleging management fraud and malfeasance and Brazilian authorities are conducting their own civil and criminal investigations while the current chief executive appointed by President Rousseff had her resignation rejected. With $135 billion in debt outstanding and an upcoming $200 billion investment program, the oil giant has turned to local issuance while external access is suspended under the graft probes implicating other big construction and supplier names schooled in the machinery of Operation Laundromat.

South Africa’s Ducked Live Wires
2015 January 7 by admin

Posted in: Africa
South African stocks kept positive despite the reintroduction of rolling power blackouts from Eskom’s strained grid as ratings agencies postponed a sovereign junk downgrade on proposed medium term budget and energy strategies. However the central bank admitted to “more uncomfortable” economic imbalances on meager 1. 5 percent growth and the current account gap at 6 percent of GDP sending the rand to a post-crisis 11. 5/dollar low. The outages come as heavy industries were already ordered to curtail use 10 percent, as mining began to recover from strikes but now faces diminished world demand and prices. Inflation has dipped below 6 percent on reduced oil and food costs keeping the benchmark rate steady, but local bond yields approached 8 percent on expectations exchange rate pass-through and foreign investor outflows could prompt tightening. President Zuma embroiled in corruption and spending probes has maintained minimal visibility on the first anniversary of Mandela’s death and has not openly endorsed fiscal consolidation at odds with ANC union member wage and social pleas. On the foreign policy front he has also been silent on President Mugabe’s purge of top officials in Zimbabwe after his deputy was accused of coup-plotting. He named a former security minister loyalist almost age 70 as vice president defying rumors of grooming his wife as successor as the MSCI Frontier component fell 10 percent extending Sub-Saharan Africa’s 2014 correction. The intrigue followed preparation of a new IMF staff-monitored program at a “crossroads” as domestic reform and international creditor normalization lagged post-election. Growth will end the year at 3 percent on massive company manufacturing and mining shutdowns despite ample agricultural harvests. Inflation will be near zero on foreign currency use and reserves meet less than a month’s imports on a 20 percent of GDP current account chasm funded by Chinese and private borrowing and chronic arrears buildup. The government wage bill rose 15 percent on campaign promises, and the banking sector continues to contend with a near 20 percent NPL ratio.

The Fund foresees “sluggish” growth in 2015 as fiscal policy aims for primary balance through civil service rationalization. Diamond industry royalties will be revised with the state-run company to publish annual accounts. Over $250 million in securities were issued to cover unpaid bills which declined last year. Central bank recapitalization is in course as the government assumed non-core debt and treasury deposits were transferred from the commercial system. A lender of last resort pool may be established with outside technical help as the number of problem banks was halved. A special purpose vehicle will be launched to centralize and resolve problem assets alongside a credit register as stricter capital standards are phased in by end-decade. External debt distress lingers despite more concessional Chinese borrowing and minimal Bretton Woods institution payments which would still not pave the way for HIPC relief. The indigenization law will be clarified by March with detailed guidelines for foreign direct investors as portfolio players brace for further shocks.

Korea’s Cinematic Stagnation Staging
2015 January 2 by admin

Posted in: Asia
Korea shares continued to decline after brief foreign investor inflows on the North’s reported cyber-attack against Sony Pictures in the US to prevent release of a film comedy about the Great Leader and the Finance Minister’s 2015 economic downgrade with longer-term stagnation warnings. Washington threatened retaliation and China urged a halt to such hacking it is also said to sponsor as nuclear facilities in the South were also recently targeted. The won has tumbled to 1100/dollar in the wake of the yen’s record plunge under additional monetary expansion, with next year’s growth revised to 3 percent on 2 percent inflation and less than 5 percent export increase. To support the currency the central bank has occasionally intervened and relaxed capital inflow controls on derivatives. The benchmark rate has stayed flat on 1 percent November inflation aided by reduced oil import costs. Authorities are wary of further household borrowing with debt approaching $1 trillion, and fiscal stimulus in the latest budget has been relatively ineffective with poor consumer sentiment. The chaebol continue to come under legislative and activist pressure to raise dividends and corporate governance standards although the President has backtracked on her campaign breakup platform and big shareholders were recently stymied by Hyundai Motors $10 billion purchase of Seoul financial district real estate against the wishes of critics like Templeton Funds. Samsung with mixed earnings is facing global investor divestiture demands to boost value as original family owners show little sign of relinquishing control. The business culture of impunity was also tested as sentences were handed down for the ferry sinking claiming hundreds of student lives which families did not consider harsh. The anti-conglomerate thrust has lost momentum as cross-border auto and technology competition intensifies with Japan after Abenomics’ renewed election mandate. The Prime Minister’s ruling coalition shed just a few seats with the weak opposition despite negative Q3 growth and capital spending. The second sales tax rise has now been shelved even with a Moody’s sovereign demotion on the decision, and the 2 percent inflation goal delayed for the medium term. The “third arrow” structural reform elements of the program have leapt to the forefront with the convincing win as the free-trade TPP with the US may gain agricultural and industrial backing after previous negotiation impasse.

China was originally excluded but Washington has revisited the prospect for a bilateral investment treaty as the Republican-led Congress prepares to convene through the remainder of President Obama’s term. The PMI again dipped under 50 as 7 percent GDP growth has surfaced as the official 2015 target despite leaner housing and fixed investment indicators. Producer prices show deflation as the renimbi has slipped 2 percent against the dollar under the wider fluctuation band. Total social financing returned to the RMB 1 trillion monthly mark as the central bank injected liquidity and may further loosen reserve requirements. The Shanghai exchange was buoyed by new retail accounts shifting from shadow wealth products under fire and from bonds subject to tougher disclosure which have choked local government emissions.

Nigeria’s Stretched Band Recoil
2015 January 2 by admin

Posted in: Africa
Nigerian stocks were down 30 percent on the MSCI Frontier Index after the central bank raised the benchmark interest rate and depreciated the currency band almost 10 percent to the dollar, as the Finance Minister scrambled to slash the budget around a $65/barrel oil price. The naira promptly fell through the floor toward 185 to the dollar prompting intervention from $37 billion in reserves or half a year’s imports as overnight borrowing rates touched 45 percent in a bank cash squeeze. Inflation should again reach double-digits on devaluation and food and transport disruption in the North from the Boko Haram siege as GDP growth slides to 5 percent. The budget deficit will stay at 2 percent of GDP but may draw on $4 billion in the excess crude account as lower fuel subsidy cost aids spending. Petroleum production is just over 2 million barrels/day as the Delta region focuses on security challenges and the upcoming February election with the ruling PDP party ahead in opinion surveys. President Jonathan is on track to get the nod in his own right but even business loyalists are clamoring for a shakeup in economic and anti-terror policymaking. As foreign investors have dumped debt and equities local counterparts are hoarding dollars pending new government moves, as the long-delayed petroleum reform bill may be abandoned for a fresh model with the global price slide and alternative energy competition. The continent’s other leading source Angola based the 2015 budget on $80/barrel with a 5 percent of GDP deficit which was to be partially covered by a Eurobond. The $5 billion sovereign wealth fund managed by the president’s son has begun allocation, but that amount already went separately to a bailout of Portuguese bank BES’ local arm as Fitch downgraded the BB- rating outlook to stable. Before the collapse, system NPLs were one-tenth the total, with the Dos Santos administration in arrears to contractors on weak 4 percent growth. The main liquefied natural gas plant suspended operations and exploration for off-shore pre-salt deposits has yet to be completed, as the IMF in post-program monitoring urged greater transparency and infrastructure building within 40 percent public debt/GDP. Gabon is another oil giant with bond jitters despite a $10 billion economic diversification plan as onshore fields are exhausted ahead of 2016 elections. President Bongo may face a stronger run from a new opposition group led by the former chair of the African Union, especially if subsidies and salaries are trimmed and debt placement on the Francophone regional bourse becomes more expensive.

Copper has also been a big commodity loser roiling Zambian paper ahead of January elections to choose a successor after President Sata’s death. His Patriotic Front party will present a candidate to fill the remainder of the term until 2016, and spending will likely worsen the 5 percent of GDP fiscal gap with IMF talks on hold as intervention strings along kwacha correction.

Africa’s Tethered Trade Finance Hub
2014 December 29 by admin

Posted in: Africa
The African Development Bank after approving a $1 billion export credit support program completed a 45-country survey of 275 banks noting unmet demand over $100 billion, or one-third existing lines. Default rates at 4 percent are quadruple the average in other regions, but still lower than the overall NPL ratio as the activity accounts for over 15 percent of earnings. Limited dollar liquidity and confirming bank risk parameters for letters of credit are major constraints, but three-quarters of respondents plan near-term balance sheet and off-balance sheet expansion. Intra-African trade is only 10 percent of the total and during the 2008 global financial crisis facilities were cut with higher costs and shorter terms and stiffer collateral conditions, according to the study. The respondents were a cross-section of local and foreign, and state and privately-owned institutions, with North and Southern African ones the largest. Return on equity was 15 percent as of 2012 and bad assets were 9 percent and concentrated in government-run groups. In the sample 95 percent were involved in export finance, and its income contribution was greater in conflict and oil-importing countries. Guarantee and L/C volume is more from developed-country based sponsors and their amounts typically exceed normal loans and revolving credit. The BIS estimates global trade finance around $7 trillion, half in the Asia-Pacific, which puts the continent’s share at 5 percent. African banks issued an annual 400 L/Cs with median value of $2 million, and the fee was between 0. 5-1 percent, with the upper range in Central and East Africa. The rejection rate was 10 percent, with the absence of central credit registries often cited as an obstacle. Among currencies, 80 percent were in dollars, with the rest in euros and renimbi and Basel III prudential guidelines will further shrink exposure from traditional Western players such as Standard Chartered, Citigroup and HSBC, the review notes. Less-dominant confirming banks are also found in all sub-regions and the Cairo-based Afreximbank has joined as a multilateral agency. With GDP growth expected to average 5 percent according to the AfDB the majority polled expect needs will remain unmet due to foreign exchange, capital and creditworthiness drags, and the Development Bank’s pool can only cover a “fraction. ” In 2009 international financial institutions combined for $4 billion in assistance, but the shortage has since worsened, the paper concludes.

While AfDB headquarters was returned to Abidjan, it chose Casablanca, an aspiring cross-border hub, as the domicile for the $3 billion Africa50 infrastructure fund. Morocco’s BMCE focused on trade is in 15 countries, and the IMF predicts 4-5 percent growth in 2015 with tourism and auto-related FDI improvement. Despite the 5 percent of GDP fiscal deficit and cautious subsidy reform Fund program compliance enabled smooth euro 1 billion bond placement and stock exchange performance has been positive. President Kaberuka praised the vehicle launch as the search intensified for a successor after his two terms colliding with commercial finance mobilization.

Hungary’s Recanted Mass Conversion
2014 December 29 by admin

Posted in: Europe
Hungarian shares were off 25 percent for the worst Central Europe MSCI result as ratings agencies reaffirmed the BB+ sovereign grade but highlighted greater banking system fragility with the latest foreign currency mortgage conversion order. Prime Minister Orban reiterated his goal of asserting domestic lender dominance as Austrian parents prepared for additional write-downs with NPLs already at one-fifth the total. The household redenomination cost will top EUR 10 billion but the exchange rate will be close to market as the central bank offers a reserve backup line. Economic growth is set to slow to 2. 5 percent on lower EU-aided public investment and Eurozone lethargy, but the currency and bonds could rally indirectly with ECB official buying in an expanded quantitative easing program. With reduced food and energy expense deflation has taken hold despite the forint above 300/euro, and benchmark rate cuts could resume. The 2015 budget is designed within the 3 percent of GDP deficit target, but informal sector collection may be overstated and the government has already retreated on an internet levy after popular uprising. Remaining private pension portfolios may be commandeered as a loyal base at home and abroad is sought for debt placement with the ratio frozen at 75 percent of output. Polish equities declined less than 10 percent as Q3 growth over 3 percent was the best in 2014 with the zloty firm against the dollar. After a 50 basis point drop the monetary authority paused as agricultural prices continue to recede with the Russian import ban. Public debt has fallen to 50 percent of GDP with private pension takeover cancellation, and the new prime minister will continue state enterprise stake sales for further revenue. She is considered an able steward in advance of 2015 elections, with the opposition Law and Justice Party currently the opinion favorite. Early predictions point to another coalition and euro entry is unlikely to feature on any platform despite Lithuania’s joining in January as the timetable slips to the next decade. In the Czech Republic the MSCI Index is positive on a balanced current account and record trade surplus with the fixed 27/euro rate due to last into 2016. Consumer sentiment has picked up along with inflation possibly nearing the 2 percent goal next year, although political backlash along income and generation divided in the Slovak Republic has raised border concern and reinforced aversion to near-term single-currency adoption there as well.

The three countries were also cited in a December BIS warning on corporate external borrowing through offshore affiliates estimated at $250 billion or half the five-year post-crisis sum through 2013. When the proceeds flow to headquarters they are classified as FDI in official statistics although they may have speculative effects and purpose more like “hot money,” according to the quarterly review. Overseas funding exposure may be 50 percent above the figure captured in banking and debt categories in balance of payments accounts, as groups acting as “surrogate intermediaries” may find their fertility wane.

The Philippines’ Hemmed Hurricane Resistance
2014 December 22 by admin

Posted in: Asia
Philippines debt and equity maintained double-digit gains as another massive December typhoon lashed the islands, with resident evacuations and property defense carried out pre-emptively with advance warnings. The sovereign investment-grade rating was lifted a notch despite GDP growth leveling to 6 percent on reduced government spending after a unilateral President Aquino scheme was dismissed by the courts. It will be superseded in 2015 by the long-planned public-private partnership regime designed for infrastructure, as lower oil prices also limit inflation to the 2 percent target and aid domestic consumption. However worker remittances from the Gulf could suffer as the peso has buckled below 45/dollar. The central bank has held interest rates but bank deposits have shifted to foreign currency as political drama unfolds over a possible presidential second term bid despite sagging popularity ratings. Business executives have applauded his anti-corruption problem-solving stance but note a lack of common touch in part due to the historic pattern of family dynasties at the helm. An open succession campaign would have front-runners from the main parties but could see independent candidates intent on appealing to an untapped youth vote, according to observers. This base was instrumental in Indonesia’s nod to President Jokowi, who immediately alienated it with a 30-percent fuel subsidy increase saving half a percent in output as he followed through on campaign hints. Angry demonstrations ensued but better food distribution may slash staple costs to offset the blow. The foreign direct investment agency has been recast as a one-stop shop and longer term strategy call for return to net energy exports with hydrocarbon law and royalty overhaul. Growth will again be just 5 percent next year and the rupiah has tumbled toward the 13000/dollar mark as monetary policy has tightened. Officials are closely monitoring global climate negotiations in Peru as China, a major coal customer, has already pledged a 25 percent carbon emission cut over the next decade. The current account gap is projected indefinitely at 2. 5 percent of GDP and foreign bond funds have recently turned cautious with state banks and pension funds exerting more influence.

Malaysia in contrast has experienced across-the-board asset selloff as the region’s sole oil exporter with the ringitt at a post-crisis low as the central bank slams undue “speculation. ” Public debt/GDP may crack the 55 percent statutory limit with the relentless price decline although prior subsidy removal may cushion the budget drag. Value added tax will go into effect the next quarter and fixed investment may soften despite projects in course under the Prime Minister’s Economic Transformation Program. Petronas shares have dragged the MSCI Index to an over 10 percent loss as the government hydrocarbon giant tries to diversify overseas, most recently with an Argentina shale deposit deal. The airlines investigation continued in Ukraine as experts got access to the presumed missile site and authorities may have to contend with additional liability claims as the family storm continues over a missing predecessor.

Honduras’ Asylum Seeking Recognition
2014 December 22 by admin

Posted in: Latin America/Caribbean
Honduran bonds rallied as a Central American overweight with the IMF inking a 3-year $100 million facility as the new government embraced fiscal and monetary discipline despite dubious law and order progress as child immigrants continued to flee violence and an international beauty contest winner was murdered. GDP growth is forecast at 3 percent next year on US remittance and trade upswing on lower inflation at double that level with fuel price relief. The fiscal deficit should come down to 3 percent as public debt is restrained beneath 50 percent of GDP. The current account gap remains steep at 7. 5 percent but an FDI and tourism campaign aims to boost coverage. Guatemala is considered a model with revenue up 5 percent on two million leisure and business arrivals, enabling higher growth through ancillary services and official debt at only 25 percent of output. Panama has kept its status as growth leader but the rate has cooled to 6 percent as public works outlays breach the fiscal responsibility law 2 percent deficit ceiling. Canal earnings rose 5 percent but the expansion is a year behind schedule and larger vessel traffic will not accelerate until 2016. The Dominican Republic’s GDP showing has been similar with remittance and visitor surges and a deal on Petro Caribe debt to Venezuela may be struck at a discount paving the way for further commercial issuance in the absence of an IMF arrangement. Gold exports have provided support after mining rules were clarified and border tensions with Haiti have eased fostering joint ventures. Costa Rica’s new administration has scrambled to regain momentum after a big computer maker closed and a 10 percent currency deppreciation against the dollar, with tax collection and better business climate key priorities. Public debt is in the 60 percent of GDP danger zone and the sovereign rating outlook is stable after investment-grade loss but dedicated buyers await bolder consolidation measures. Negative parallels are drawn with El Salvador with a steeper ratio and party gridlock unable to agree on reforms with the economy operating well under potential. Banks there criticize recent imposition of a transaction tax as upcoming legislative elections are expected to again loosen the purse strings.

In the Caribbean Jamaica’s MSCI index is off 5 percent as it too is in hock to Venezuela’s Petro Caribe within the 130 percent debt/GDP ratio. The IMF program is broadly on target but growth is just over 1 percent on flat tourism performance. International reserves jumped to $2 billion after an $800 million bond placement but the current account gap may again approach 10 percent of output without sizable direct investment gains to cover it. Barbados continues to dodge the Fund’s grip with last-gasp budget adjustments but debt is stuck at 100 percent of GDP on near recession. Local banks, insurers and pension funds must fill the hole as regional players seek other island havens.

The Gulf Trio’s Oil Swing Swipe
2014 December 16 by admin

Posted in: MENA
OPEC powers Saudi Arabia, the UAE and Kuwait sold off shares as cartel production stayed constant despite the 30 percent global oil price slide in recent months. The Saudi minister in charge hinted at a Vienna headquarters meeting that output may be curtailed to just over 9 million barrels/day next year, which would place the onus on infrastructure spending to extend 3 percent GDP growth. The MSCI component had rallied 10 percent before the decision on a popular IPO from National Commercial Bank offsetting the fallout from the resignation of a telecom firm executive for alleged accounting misrepresentation. The US-trained regulator has vowed a harsher stance against abuses in the run-up to broader international opening. With the petroleum export blow the exchange rate peg has come under forward pressure in a repeat of the immediate post-2008 aftermath, although Monetary Authority foreign assets have since soared toward $750 billion and could be liquefied in an emergency. The central bank may decide to hike rates before the Fed, which could choke double-digit private sector credit expansion to support the non-energy economy. The UAE’s Emaar real estate listing hit the daily allowable bottom on new overheating fears as Dubai World moved to extend a 2018 repayment lump another 5 years after comfortably meeting 2015 obligations with asset sales. Its draw as an international education hub also came under scrutiny following attacks on teachers and alleged labor standard violations. Headline inflation has worsened to 4 percent on higher property as well as food and health care costs angering middle-class citizens. Kuwait’s large MSCI frontier weighting is flat with hydrocarbons accounting for 95 percent of revenue, but a 15 percent of GDP budget surplus is still envisioned next year. Relations with Iraq may improve in the fight against ISIS and remaining Iraqi debt may be forgiven as Baghdad tries to marshal military and humanitarian resources for the onslaught.

Middle East oil importers in turn may receive lower Gulf aid and remittance flows, and Egypt after reimbursing a Qatar loan may be preparing for other early demands as it organizes a global donor conference in the coming months, with the IMF prominent after a positive Article IV report. Former president Mubarak was acquitted of murder accusations against Tahrir Square protesters and may soon be freed from jail in failing health. Tourism has revived and the pound has been firm at 7. 15/dollar despite the recent resignation of the central bank deputy governor for alleged policy disputes. Tunisian stocks are stuck awaiting the outcome of the second presidential round run-off which focuses in part on economic issues. Manufacturing has been lackluster and depends on further Eurozone recovery and real interest rates remain negative as state bank recapitalization was delayed. The new government will revisit budget questions including possible mainstream sovereign bond re-entry in a swipe at Maghreb favorite Morocco.

Ukraine’s Frantic Foreign Fund Manager Mandate
2014 December 16 by admin

Posted in: Europe
Ukraine external bond yields stayed at 20 percent for the second greatest EMBI loss as the President and Prime Minister after splitting party dominance in parliamentary elections named foreign-born fund managers as Economy and Finance Ministers as the half-year old IMF program further unraveled on Eastern industrial center bloodshed and energy, banking and fiscal cleanup delays. The respective appointees are private and public equity specialists from the US and Baltics and were granted citizenship upon acceptance. They will try to pass overdue budget changes and access supplementary assistance with the 5 percent output contraction due to last into 2015 with 20 percent inflation, and the hyrvnia at half the pre-revolt 8/dollar level on $7. 5 billion in reserves, not enough to cover next year’s hard currency debt repayments before gas and other imports. The separate Naftogaz bill next year is estimated at $10 billion and to replenish reserves the $15 billion Fund arrangement may have to double revisiting the urgency of commercial restructuring for sustainability with the 60 percent/GDP public debt threshold for Russian acceleration already passed. Under new guidelines creditors would at least have to extend maturities but outright haircuts may now be sought with Templeton reported as the main international fund Eurobond owner. Ukrainian corporates are not widely-held either with defaults in progress, and quasi-sovereigns may offer debt-equity swaps in workouts. Russian banks have been the dominant buyers since 2008 and they are under their own earnings pressure from recession at home and rollover squeeze from sanctions abroad. The central bank has barely intervened in the ruble crash past 50/dollar and predicated annual capital flight over 100 billion and possible double-digit inflation in 2015. With $70/barrel a fiscal deficit will appear and backstop official funds could be exhausted on state spending and company refinancing demands. President Putin has blamed the troubles on Western conspiracy and his opinion approval remains high although neighbors register historic post-communist doubts over geopolitical intentions. In Moldova Moscow’s proxy party was removed from the ballot and elections before in Latvia dented the Harmony grouping’s traditional strong showing. The premier there kept her coalition on a platform of budget discipline and modest growth with minimal inflation despite lower Russian exports.

Serbian shares pared a 15 percent MSCI drop as the cultural Russian ally renegotiated a 3-year IMF standby of up to EUR 1 billion after the Prime Minister slashed official wages and pensions with the budget gap at 8 percent of GDP. Recession is again set for 2015, but inflation should be close to the 5 percent target allowing potential benchmark rate easing. Auto making has picked up followed by oil and gas exports and Croatia could be next to approach the Fund after presidential elections in December with public debt/GDP at 85 percent and the EU excess debt procedure already in operation. Coastal tourism has been diverted to other cheap Southern Europe spots as vacationers await a fresh mandate.

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The IIF’s Broken Globalization Records
2014 December 12 by admin

Posted in: General Emerging Markets
The Institute for International Finance issued a post-crisis retrospective on the “broken” globalization trend in mature and emerging financial markets since the 2007 apex and warned of an indefinite “hiatus” under new banking and securities regulation stifling cross-border flows now averaging $1 trillion annually. It argues that the process should strengthen after deleveraging from the previous decade-long credit boom with developing economies in particular a “powerful engine” despite closed capital accounts in giants China and India. That future is however diluted by uncertain prospects for trade and infrastructure finance and bond and stock market-making, as backlash from national supervisors promotes “balkanization. ” The G-20 and Financial Stability Board have been the focus for harmonizing exchange rate and monetary policies and prudential norms, but the balance between benefits and risks has often strained business models and may inject greater volatility, according to the group. Emerging markets should avoid short-term capital inflow restrictions and focus instead on local activity and institutional development. The IMF may be called in as a backstop and governance tweaks contained in pending US legislation are needed for continued legitimacy. The network of central bank swap lines could be extended as an additional safety net beyond existing mainly G-4 and regional arrangements. Since 2008 better Asia and Latin America flows have compensated for Eastern Europe’s “bust,” but by segment syndicated and project lending “reversed” while portfolio investment has been uneven. As Euro Area banks have retrenched with EM borrowers, US, UK and Japanese competitors entered, and Chinese and Gulf units have become active worldwide. Non-resident equity is closer than fixed-income allocation to the mid-2000s peak, but foreign ownership of government bonds has skyrocketed and prompted notable selloffs as in the 2013 Fed taper episode. FDI in contrast has been stable at an average $1. 5 trillion from 2010-13 increasingly in South-South direction. Financial deepening as measured by the range of assets/GDP at 200 percent is half the mature market level, but the pace slackened prior to the economic slowdown and investor liquidity and protection must become priorities as new technologies expand the product range, the IIF urges.

Capital flows/GDP at 4 percent are half the 2007 proportion and the disparity in equity market size is particularly pronounced at only 12 percent the total versus the almost one-third share of global output. Emerging market derivatives turnover has reached $1 trillion with the majority conducted over the counter, which will be subject to tighter global clearing and reporting guidelines that could delay progress. Ten case studies at the end point to good and lagging practice with Chile and South Africa praised as sophisticated middle-income destinations. China, India and Indonesia are bank-dominated with limited international participation while Russia and Turkey’s capital markets are also “shallow. ” Poland and the UAE have embraced open capital accounts and Brazil has followed an intermediate strategy, and almost all the countries despite mixed integration were “unscathed” by the post-2008 crisis in another historic break.

Iran’s Negotiation Pause Reflection
2014 December 12 by admin

Posted in: MENA
The Tehran Stock Exchange was disappointed with delay in foreign investor opening until at least next July when nuclear weapon negotiations with the West, Russia and China face another deadline after anti-enrichment for sanctions lifting talks were extended. The regime will continue to receive $700 million in monthly easing on oil sales and frozen bank accounts, and President Rouhani expressed optimism an accord would be reached as he tries to restore economic growth and combat inflation which has moderated to 20 percent and relieve youth unemployment estimated at 25 percent. The currency weakened in the parallel market with postponement of the potential investor and visitor flood although delegations will still arrive to probe commodity, consumer and financial market offerings. The President is again expected to participate in the Davos World Economic Forum in January and press his intention to cut subsidies and expand the private sector.