No More Learning

A sovereign downgrade to junk would force disqualification and the short-term debt/reserves ratio is 60 percent with rolling electricity shortages jolting rollover scope.

ETFs’ Milestone Outflow Marker
2013 July 5 by admin

Posted in: General Emerging Markets
ETFs led the debt and equity surrender from mid-May as they accounted for 30-70 percent of outflows from the BRICS supplemented by Indonesia and Mexico, with the New York Stock Exchange giant Vanguard MSCI index fund with $40 billion in assets experiencing heavy losses and volatility as many new bond vehicles scrambled to honor redemptions. The structures have become a decisive force since 2008 with retail investor entry as they mark two decades since introduction with US expansion to $1. 5 trillion overall for one-tenth of traditional mutual fund size. Of the 1000 registered only around 50 are actively managed and the passive varieties offer a range of leverage and shorting features. Three sponsors control 80 percent of the market, and households attracted by low costs have put in hundreds of billions of dollars according to industry sources. EM-specific figures show that the inflows accelerating since last fall when the Fed’s quantitative easing was extended have been erased one-third for bonds and two-thirds for stocks, with the former likely to catch up as US high-yield also folds. Shorting has already risen to one-quarter of that asset class, as NAVs across-the-board display record standard deviation for traders employing quantitative strategies. While institutions use ETFs and public mutual funds, the outflow magnitude the past few months could be far greater through private account and balance of payments data which is only loosely tracked or appears with a lag. ETF equity flight of $25 billion since February is only a portion of the over $200 billion the IIF reported in 30 countries from 2010-12, while the debt figure was five times higher. In the corporate category in particular, monthly issuance has slowed to a fraction of the previous $30 billion average pace, with lower-rated borrowers essentially shut out. Even at better grades including for quasi-sovereigns Moody’s has warned of governance and domestic financial market constraints deserving overdue attention. In Asia in particular China’s money market squeeze has cast a further shadow over China property company external paper where yields and default rumors spiked following last year’s curbs. In the region consumer credit has mushroomed as a share if GDP across the ASEAN bloc with Malaysia’s 75 percent at the top but still paltry in comparison with Korea’s $1 trillion total.

The corporate default rate hit 10 percent in 2009 as many balance sheets took currency and earnings as well as derivatives hits after assuming indefinite appreciation cycles. Big names like Cemex had to restructure with government aid, and India restricted foreign access with large state bank and family conglomerate exposures. Turkey was in difficulty as international banks reduced syndicated and trade lines but only recently have major firms tapped the global bond market on the back of the consensus investment-grade rating now in abeyance as popular disquiet dispels that sense.

Cote d’Ivoire’s Restive Reconciliation Pose
2013 July 2 by admin

Posted in: Africa
Cote d’Ivoire bonds looked to resume momentum after 2012’s tear as local elections were held under heavy security after launch of a national reconciliation commission, and annual GDP growth could again be at 8-9 percent as half of outstanding external debt arrears comes due after a $10 million down payment last December. Foreign commercial obligations to Standard Bank and Sphynx instrument holders were again restructured after the HIPC completion point was reached a year ago. Another stab at cocoa sector reform resulted in a new minimum price and stabilization fund replenishment as the government otherwise plans to reduce company ownership by one-quarter through consolidation and privatization including in key banks. This year mining and hydrocarbons should join agriculture commodities in a 5 percent export rise although the current account deficit will slightly worsen. Inflation will double to 3 percent on a 12 percent credit jump as the primary budget balance also turns negative. Domestic borrowing through the regional bourse will help cover projects like a hydroelectric dam already getting Chinese loans once arrears there are likewise settled. A new mining code is under preparation, as the harmonization of trade and transparency rules proceeds in the CFA Franc zone. A medium-term debt strategy will be presented in the coming months which will emphasize concessional and internal reliance and critical infrastructure needs. Insurers and cross-border investors will be targeted for higher allocation after Chinese Ex-Im Bank agreed to finance port and electric grid rebuilding. The area progress came as Mali now facing its own civil war received the first installment of international aid and Tuareg fighters in the north struck a tentative accommodation with the Bamako authorities. The French began to withdraw anti-terrorist troops but left open a return option as fresh elections are to be attempted in the near future.

Anglophone neighbor Ghana has long been courted by China and other big emerging economies like Brazil and Turkey but recently reacted to popular backlash with the arrests of hundreds of individual gold miners. It hired underwriters for a $1 billion second-time sovereign bond but the World Bank’s IFC arm postponed a local cedi issue as short-term interest rates skyrocketed on the 12 percent of GDP budget overrun. The current account hole is of equal magnitude and the currency has retreated against the dollar for over a year as reserves are below the sensitive 3 months import threshold. Fuel subsidy paring will aggravate 10 percent inflation as offshore oil production lags original projections and overseas partners balk at rule changes. ECOWAS power Nigeria plans its own $1 billion Eurobond as the Finance Minister embarked on a June roadshow with global investors still overweight domestic paper following incorporation into benchmark indices. Enthusiasm has however been muted by brutal attacks from the Boko Haram as well as renewed threats by MEND insurgents following demobilization to attack pipelines and publicize corruption and poverty wounds.

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Central Europe’s Pilfered Pension Pillars
2013 July 2 by admin

Posted in: Europe
As EU officials underscored the continued hold of 30 banking groups on over half of regional assets and the BIS reported another quarter of cross-border pullback, IMF research dug further to scrutinize emerging member ties and the missing insurance and pension fund capital market support for alternative funding. It found that the 20 percent drop in external positions of Austrian, West European and Scandinavian parents since the crisis had largely been filled with domestic deposits except in a few cases like Hungary, Latvia and Slovenia. Only Austria’s Erste, Raiffeisen and Volksbank had subsidiaries worth more than 30 percent of the consolidated balance sheet and M&A activity was down one-third in 2012 although Polish and Russian institutions were prominent buyers. Regulatory and central bank dictates will further accelerate repatriation and safe asset preference as new capital and liquidity ratios and the single banking union enter into force. Specialty infrastructure and trade lines and small company borrowers will suffer most from retrenchment as home and host country supervisors continue to clash over risk weightings and resolution procedure. Capital market development could promote rebalancing from foreign reliance on overdue improvements, the paper contends. In private pensions early pioneer Poland has the largest pot equal to 15 percent of GDP with 5 percent-plus return and contributions rates over a dozen years. Romania and Slovakia enacted reforms after 2005 with less impressive results. Life insurance accounts for over one-fifth of premium income in 10 countries tracked and should translate into longer-term securities demand and annuities business diversifying from the current portfolio concentration on liquid government bonds and term deposits. The typical equity allocation ranges from 10-25 percent and corporate bond annual issuance for the group is only around $10 billion. As a trading and investment channel the Warsaw Stock Exchange’s $200 billion capitalization dwarfs neighbors’ combination. Fixed-income would benefit from local credit ratings agencies and euro entry to reduce currency risk and foster bourse consolidation. Governments should be careful not to arbitrarily cap pension manager fees while they consider the scope for introducing structured products like infrastructure bonds even though Brussels has been lukewarm on the idea, the document concludes.

Poland’s zloty debt has also been popular with foreign investors who control almost 40 percent of the amount outstanding as the currency and economy continue to slide. The PMI is below 50 on projected 1 percent growth bringing modest benchmark rate reductions. FDI covers over half the current account hole unlike the meager $3. 5 billion 2012 figure in Hungary, where the Orban administration has added taxes on absorbed municipal loans to the panoply of bank headaches. To stay outside the excess deficit sanction it retains the option to raise and indefinitely extend the special levy imposed on taking office. The new transaction charge has been passed on to customers aiding fee revenue amid otherwise paltry profits.



Tunisia’s Importuning Immolation Pact
2013 June 26 by admin

Posted in: MENA
Tunisian stocks were ambivalent as a 2-year $1. 75 billion IMF standby was reached by the Islamic party-led government just prior to full-fledged elections which will also determine backing for a new constitution, as immediate actions are unlikely to retrieve the lost investment-grade rating or redress 35 percent youth employment which continues to stoke security and social tensions. Religious-secular divisions have worsened since the killing of an opposition political figures= and a militant influx from Libya with the Kaddafi regime’s overthrow, as 4 percent GDP growth expected this year has not met the pre-revolution norm on food-driven inflation at 6. 5 percent in Q1 with persistent budget and current account deficits. Public debt is 45 percent of GDP as US and Japanese loan guarantees enabled international capital markets access and central bank refinancing jumped 50 percent in 2012. Non-performing loans especially at key state lenders are around one-fifth the total and deposits have been flat despite a 12 percent average capital adequacy ratio. With Eurozone pickup and resumed mining exports the balance of payments should improve, while bank recapitalization and overdue payment clearance are domestic priorities. On monetary policy the recent tightening course should continue on lower local bond issuance as the additional consumer exposure reserve requirement will be cut from 50 percent to 30 percent. The three main public banks will undergo strategic and operational audits as a separate asset management company is created for bad tourism-related debt transfer. Wage and subsidy reductions are designed to curb spending as consumption taxes and stamp duties introduced several months ago raise revenue. The two decade-old investment code, which has attracted minimal value-added assembly operations, will be overhauled with World Bank technical assistance amid a general review of competition law and customs regulation. With the Fund infusion reserves will cover over 4 months’ imports, and year end sukuk placements could bring further long-term resources alongside official partners with legislative passage.

Pakistan securities have rallied in contrast as Nawaz Sharif takes the helm for the third time with close IMF and Gulf ties to secure emergency lines to meet import and foreign repayment needs. The sovereign rating is in the distressed “C” category on 3 percent GDP growth and inflation double that level. Tens of millions of citizens live in poverty and malnutrition and lack electricity also unavailable in the commercial hub Karachi. Saudi Arabia which has been a major donor has been approached for a $5 billion concessional credit for budget and power support pending resumption of a Fund arrangement which previously lapsed on failure to raise tax revenue-GDP from the 10 percent range. On the diplomatic front, the administration also hopes to slash the defense burden with assignment of “most favored nation” status to India to boost instead the meager $2 billion in bilateral commerce as the nuclear rivals otherwise skirt self-destruction.

The World Bank’s Diminished Prospect Diatribe
2013 June 26 by admin

Posted in: General Emerging Markets
The World Bank shaved its developing region growth forecast to 5 percent in the mid-year global economic prospects publication with East Asia and Sub-Sahara Africa at the high end while citing bank distress, output gaps and commodity reversals as major constraints elsewhere. Monetary tightening may be needed against incipient credit bubbles and current account deficits, and faster rebalancing is urgent for China’s “unsustainable” fixed investment. Structural reforms in regulation, enforcement, education and health must be “prioritized” especially with agricultural, metals and energy export slides and potential quantitative easing pullback. The additional liquidity from low industrial country interest rates has generated only 4 percent of GDP in net capital inflows in comparison with the pre-crisis 7 percent. With unwinding debt-service costs and defaults will rise and growth could decline half a point. In recent months cross-border bank lending to emerging Europe and MENA has recovered as private funding heads toward $1. 2 trillion this year. Outward south-south allocation will also be steady at $375 billion with trade up 15 percent in Q1. Official development assistance in turn fell 4 percent in 2012 especially from peripheral Europe sources as the 0. 3 percent of national income share remains less than half the Paris Club goal. Remittances outside Europe have increased for a $400 billion total in 2012, outpacing all capital inflow categories except FDI, as strong Latin America numbers from the US were undermined in Spain. In Brazil, India, Russia and South Africa recent growth has lagged the boom due to outstanding supply-side obstacles. In Asia the yen’s initial sharp depreciation upset currencies but few neighbors compete directly with their goods and their manufacturing chains tied to Japanese exporters could ultimately benefit. A near-term 100 basis point spike in advanced economy yields could lead to almost double that elevation for emerging markets according to historic data. In thirty five low and middle income nations gross government debt is above 50 percent of GDP and twenty have private external exposure over 30 percent. In China, Malaysia and Thailand domestic corporate and household debt ratios approach or exceed 100 percent and represent “great risk” the Bank warns.

Jamaica and Pakistan are in the most vulnerable official group as the former just resurrected a suspended IMF credit and the latter pursues the same course. Jamaican foreign bonds have thus far escaped restructuring despite a wave of Caribbean sovereign haircuts and Pakistan’s returned President Sharif intends to borrow further in advance of Fund talks to settle state electric company arrears aggravating shortages. Power curbs are also an overriding issue for South Africa as Eskom is shunned by domestic and foreign lenders, and mining production is already stifled by strikes and hefty union wage demands. In the immediate 2008 crisis phase rolling blackouts compounded output losses with Q1 GDP growth performance under 1 percent the worst since as commodity and currency prospects decline.

The Baltics’ Querulous Euro Queue
2013 June 24 by admin

Posted in: Europe
Baltic stock markets were buoyed by EU approval for Latvia to follow Estonia into the euro as Brussels hailed the “entry and not exit queue” although 60 percent of Latvian opinion is currently against joining. Popular grumbling was again reflected in a strong local election showing by the pro-Russian Harmony Center party which controls Riga, as the ECB also warned of fast growth in non-resident deposits from the broader CIS accelerating after the Cyprus debacle. $500 million was added in Q1 to this pool which accounts for half the system total, although supervisors recently imposed stricter capital and liquidity requirements with the buildup. They as well introduced anti-money laundering rules in response to watchdog criticism and negative headlines over the Magnitsky fraud case in Moscow, which spurred US sanctions over human rights and judicial abuses. GDP growth has declined from last year’s 5 percent on softer exports, but domestic demand remains supportive after the post-2008 rescue internal devaluation process which reduced labor and overhead costs. The IMF ended its presence in the capital as the investment-grade sovereign rating was restored and fiscal and inflation performance reverted to the Maastricht criteria. Euro opponents note that Estonian prices doubled after admission and that the country cannot afford that risk as the EU’s third poorest after Bulgaria and Romania. Both Estonia and Lithuania, which lingers in the ERM “waiting room,” were up around 10 percent on the MSCI frontier index through mid-June. The new Lithuanian coalition government has promised to tackle double-digit unemployment and keep the budget deficit at 3 percent of GDP with help from state company dividends and divestitures. The minimum wage was hiked 20 percent this year despite the slim odds of repeating 2012’s excellent harvest with agriculture an export mainstay.

Bulgarian stocks have rallied 50 percent as the incoming Socialist-led government headed by a former Finance Minister reiterated anti-corruption and structural reform commitments within the context of preserving the currency peg and fiscal discipline. The banking sector, with high non-performing loans and Greek ownership, continues to suffer after imposition of an interest tax and FDI is skittish after the Czech utility CEZ’s license was cancelled and a state railway sale was postponed. GDP growth will be only 1 percent in 2013 but the current account deficit has come down to minimal levels as foreign reserves dipped to $12 billion in Q1 after Eurobond repayment. Romania managed a 5 percent gain as the European Commission recommended removal of the excess deficit procedure and the currency held relatively firm despite global flight with the minor foreign ownership position. Both JP Morgan and Barclays included local debt in benchmark indices, and the central bank is set to cut rates despite a GDP growth upgrade to 2. 5 percent. Other Balkan exchanges were mixed, with Croatia ahead on July EU accession and Slovenia off slightly as the former prime minister was convicted of bribery and officials scrambled to counter bailout talk by again lining up regional buyers for a retail store chain.

The Middle East’s Mechanical Morose Murmurs
2013 June 24 by admin

Posted in: MENA
Mideast stock exchanges were depressed even before general market selloffs as MSCI’s decision to finally graduate the UAE and Qatar to the core universe was offset by Morocco’s frontier demotion and Egypt’s teeter again on that precipice on liquidity and foreign exchange squeezes. The junior party in the Islamist-headed coalition has threatened to leave over food and energy subsidy rollbacks demanded under the IMF accord as the Q1 fiscal deficit came in at 2 percent of GDP. The support takes 15 percent of public spending and the government plans to redesign programs to target the poorest. Economic growth may almost double this year to over 4 percent on agricultural rebound, while external accounts continue to languish from the Eurozone crisis. Phosphate export prices remain low, but FDI recently increased on a large dairy firm deal. The central bank has maintained the 3 percent benchmark rate on subdued inflation and championed a securitization law for state and corporate sukuk issuance. Local mutual funds with $30 billion in assets are eager for the instruments and foreign investors after subscribing a late 2012 Eurobond should join if the BBB rating stays for the new class. An initial placement program is set at $1. 5 billion as a larger package was also signed with the Islamic Development Bank through mid-decade designed to fall within the 60 percent of GDP self-imposed official debt limit.

Jordan and Lebanon were likewise off 5 percent through June as the former received a second $400 million installment of its Fund standby and the latter ended a political impasse with a compromise Sunni prime minister. King Abdullah unveiled his cabinet several months after parliamentary elections featuring loyalists and technocrats as he sought Western and Gulf assistance to handle the influx of 500,000 Syrian refugees. The US also agreed to guarantee a planned external bond as in Tunisia’s previous case in a $1-2 billion range to redress the almost 15 percent of GDP current account gap. Repeated disruption of Egypt’s Sinai gas pipeline has been replaced by expensive imports as regional energy cooperation is slim despite a $4 billion Israeli-Palestinian venture scheme announced by former British Prime Minister Blair in critical sectors. Lebanon’s recession lingers with the conflict next door on a disappearing primary budget surplus and double-digit inflation. Bank deposit growth is at a 5-year low as another round of polls is due soon which could extend the traditional sectarian and ideological standoff.

Israeli shares have stumbled on popular protests against austerity moves to restrain defense and social outlays amid a 4. 5 percent of GDP fiscal deficit as the debt restructuring saga of the Dankner family conglomerate weighs on a cross-section of major listings. The tycoon controls IDB but also obtained relief from Bank Leumi on his leveraged empire before widespread business and financial community criticism forced a harder line. In outgoing gestures central bank chief Fischer exhibited interest and exchange rate activism even though the exchange’s MSCI Europe bid was halted.

Egypt’s Morsi Plea Rejections
2013 June 19 by admin

Posted in: MENA
Egyptian shares and the pound were down double-digits as parliamentary election scheduling was further complicated by a Supreme Court finding that current representation was unconstitutional, as millions of signatories demanded another presidential election on the first anniversary of Morsi’s narrow Muslim Brotherhood win. The two-year IMF negotiations for an almost $5 billion credit remain snagged, although officials contend they have prepared subsidy and tax plans to meet requirements and that Fund administrative and technical delays were to blame. The budget deficit ballooned to 10. 5 percent of GDP in the current fiscal year as Treasury auctions continue to fail on lackluster appetite and 15 percent yield insistence. Gas shortages are widespread as the government has accumulated arrears on fuel imports, with FDI on hold in light of investigations and reversals of previous privatizations where the state was ordered to buy back control but lacks the money with public sector debt/GDP at 80 percent. Qatar has lifted reserves over $15 billion with a near $3 billion bond 18-month bond purchase at a 3 percent coupon. The central bank has held steady on 8 percent inflation as NDF values project the currency at 7 to the dollar at a discount to the spreading black market. The IMF’s latest regional review put economic growth at 2 percent on the same current account gap/GDP figure as almost one-fifth of the population faces “food insecurity” according to the UN. Bank and sovereign ratings have been slashed to CCC as officials have requested payment relief on essential commodity imports. Former president Mubarak’s trial is due to resume in July with the US closely monitoring the proceedings as it released $1. 5 billion in annual military aid despite the sentencing of non-government organization workers including the son of the outgoing Transportation Secretary. Another cabinet reshuffle appointed an Islamic scholar as Finance Minister who will explore potential sukuk placement in Asia and the Gulf. With the diminished police presence a crime wave has gripped Cairo and Alexandria, which are largely bypassed by mainly Russian tourists heading to southern beach resorts.

Russian shares are also in the cellar despite low single digit P/E ratios and bond auctions there have featured uncompetitive bids by banks and institutions worried about 2 percent growth and 7 percent inflation amid falling world hydrocarbon prices. Since granting direct OFZ access non-residents have been cautious in contrast to early speculation that their portion would spike to 30 percent of the total. The central bank has eased incrementally as it transitions to new leadership, while President Putin’s assertion of dominance at the helm sent an economic adviser into exile as a prominent blogger critic awaits trial. In foreign policy military and energy interests continue to back Syria’s Assad even as thousands of Russians living in Damascus and elsewhere have fled. The wealthier have preferred relocation to Dubai, which received the same influx after the Cyprus carnage.

Brazil’s Tax Dodge Drift
2013 June 19 by admin

Posted in: Latin America/Caribbean
Brazilian shares and the real were stuck in their slump despite the surprise removal of the 6 percent tax on fixed-income inflows as its champion Finance Minister Mantega pointed to less flush global liquidity condition than during the 2011 imposition. The levy endures for company short-term borrowing and may be reactivated without notice reflecting policy doubts that along with fiscal relaxation contributed to an S&P sovereign outlook downgrade. Annual GDP growth is under 2 percent with all categories outside agriculture showing poorly in the latest report. Inflation is above target at 6. 5 percent in part due to currency pass-through as the central bank hiked rates another 50 basis points to 8 percent and is set to sustain that course in the coming months. The current account deficit is at 3 percent of output with FDI wavering to cover it. The primary budget surplus under standard accounting may drop to half the traditional 3 percent as government infrastructure projects attempt to lay the groundwork for consecutive global sporting events and lift the fixed investment rate to 20 percent of GDP. The World Cup will require $15 billion for facilities and transportation and private firms have shied away from participation with regular rule changes. The $6 billion offering of Banco do Brasil’s insurance unit has not reversed the sour exchange mood toward headline listings like Eike Batista’s OGX which has lost 90 percent. His empire extends to the beef industry where a large proposed merger will load up on additional debt. State oil titan Petrobras has also borrowed heavily abroad as it plans to auction off offshore pre-salt layer exploration rights Production after hitting 2 million barrels/day continues to decline as the new chief executive appointment by the President defends ambitious medium-term fundraising and exploration strategies. Banks have sold off after a 25 percent jump in small and midsize company bankruptcy filings in the first quarter under the 2005 “judicial settlements” regime. The Caixa Economica official network also experienced a brief run on rumors of a shutdown in the popular Bolsa Familia cash transfer program which includes 50 million citizens. Citigroup sold its consumer finance operation to private sector leader Itau as the US backed the Brazilian delegate’s ascendancy to WTO head over a Mexican candidate.

The Mexican peso was as well in the firing line as it breached 12 to the dollar and long-term bond yields jumped as crossover junk investors north of the border in particular shed positions. The outflow swamped the $2 billion Japanese retail players have plowed in as Q1 portfolio allocation was half the 2012 level on a 2 percent of GDP current account hole. Domestic demand weakness will keep economic growth from the original 5 percent forecast but structural reform optimism has revived from a passing spat between the ruling PRI and other parties with the financial package slated for a summer legislative wrap.

The Andes’ Dizzying Descent Demons
2013 June 17 by admin

Posted in: Latin America/Caribbean
Peru was the worst Latin American core universe performer through May with a 20 percent decline with Colombia almost at the same level as the two struggled with economic reversals at home and the diplomatic and trade fallout from the disputed presidential election and tentative transition to the Maduro administration in Venezuela amid potential hyperinflation. Lima reeled on below 5 percent GDP growth as commodity exports sank 10 percent and the sol hit a 2-year low against the dollar, jeopardizing foreign investors’ 60 percent ownership of local debt. Banks which have stoked consumer lending were battered in particular with the 40 percent dollarization in the system and central bank reluctance to intervene although reserve requirements were recently loosened. The current account deficit is near 5 percent of GDP as inventories and government and private investment continue to shrink. With the traditional growth engine stalling President Humala has hardened his rhetoric toward energy and mining multinationals and hinted at nationalization of Spanish firm Repsol’s domestic assets. His opinion favorability has dwindled to 45 percent on dented business confidence as in another pattern resembling Argentina’s a powerful spouse positions to succeed him for a second term. Colombia peso is down this year almost equal to 2012’s 10 percent appreciation as the monetary authority ended previous daily dollar purchases and the private pension supervisor delays rules to encourage additional overseas holdings. Oil and coal exports have slumped on strikes and lower world prices as Q1 output growth faded to 4 percent on poor industrial production and retail sales. President Santos’ negotiators have launched further peace talks with the rebel FARC as the state tries to extend it presence to isolated rural provinces with the support of external aid organizations. The family Grupo Aval conglomerate listed its banking arm through New York ADRs as the Finance Ministry pledged to weed out brokerage misconduct after a failure last year uncovered massive money laundering.

Venezuelan bonds, after a huge rally as ex-President Chavez exited the scene, have fallen on the benchmark EMBI as his successor’s economic policies are unclear and the OAS and judicial bodies will consider ballot integrity and recounts in the less than one percent margin win over opposition challenger Capriles. US Secretary of State Kerry met with the Foreign Minister in a rare meeting and finance officials have signaled an imminent road show to improve relations with global investors still awaiting details of sovereign borrowing and currency trading arrangements. Although the current account surplus is back on petroleum proceeds capital flight still reduces reserves and recession has set in after the election-related spending binge. Widespread staple shortages including of electricity and toilet paper have contributed to 35 percent inflation and oil monopoly PDVSA remains in difficult discussions with minority partners in joint ventures to secure additional funding. The exchange rate in turn could move to crawling peg under an update to the SICAD platform which has matched President Maduro’s thus far splintered perception.

Asia’s Simmering Small Exchange Smash
2013 June 17 by admin

Posted in: Asia
After pacing the region for the past year the Philippines and Thailand succumbed to individual jitters and broader equity flight paring gains to slightly positive as residual enthusiasm turned to long battered developed Japan on reflation bets. In the other area giant China stocks have been off 5 percent despite the strongest renimbi fix versus the dollar at 6 just prior to a regular bilateral summit in California dominated by cyber-security rather than currency and trade issues. Total social financing from banks and non-banks stands at 200 percent of GDP according to Fitch Ratings but fell sharply in May coincident with GDP growth softening to 7-7. 5 percent. The new central bank head foreshadowed further interest rate liberalization as his securities counterpart overhauls IPO rules to unlock months of company backlog. Inflation is below target at 2. 5 percent, but authorities remain reluctant to inject liquidity as they try to tackle property overheating and industrial overcapacity. Solar firm subsidies and aggressive expansion were in the headlines as the US and Europe pursued unfair competition actions and debt repayments were halted to foreign holders. The Philippines’ Q1 economic growth mirrored the mainland’s at almost 8 percent on the heels of attaining investment-grade status. The agencies cited better governance and tax collection which should enable the 2 percent of GDP fiscal deficit goal with a primary surplus. President Aquino’s position was reinforced by his coalition’s recent romp in Senate elections mobilizing support for new central bank and mining laws. Worker remittances from the Gulf and other regions continue to boost the peso, which has been among the few overweight recommendations by sell-side houses as officials signal selective rate reduction. The Thai baht however outperformed through May as it hit a 15-year high against the dollar before a 25 basis point benchmark cut as additional capital controls were debated. Foreign bond investors with a 10 percent stake joined the exit rush soon after amid disappointment that infrastructure projects may not be in place for the 5 percent growth forecast. Consumer credit is also rising 20 percent annually and venerated Thai tycoons have been involved in leveraged takeovers reminiscent of the pre-Asian crisis period. Major Bangkok exchange listings have touted cross-border plans for Myanmar, which just hosted a World Economic Forum meeting where Nobel laureate Aung Sung Su Chi announced her 2015 presidential candidacy and financial service providers complained of approval delays and technology lags.

Indonesia and Malaysia were previously sidelined as the former resorted to heavy rupiah intervention on a chronic current account gap aggravated by a temporary Chinese ban on coal imports, and the latter bred political animosity as a ruling party victory was challenged by numerous irregularity charges. Indonesian inflation is due to reach high single digits on fuel subsidy removal, while Malaysian transfer programs have resisted change despite perennial policy blueprints underscoring the shaky public debt foundation.

The EU’s Exasperating Excess Exclamations
2013 June 12 by admin

Posted in: Europe
Hungary and Poland revived their candidacies for medium-term euro entry as the European Commission released them from the excess fiscal deficit procedure delaying consideration and imposing fines at readings over 3 percent of GDP following the original Maastricht criteria. Budapest had triggered possible suspension of cohesion aid last year but the gap came in at 2 percent despite continued Brussels criticism of foreign bank and direct investment taxes indefinitely continued beyond the initial expiration date. A financial transactions levy has since been added raising only half the budgeted amount as the EU prepares a regional counterpart for securities and derivatives activity. Growth has turned positive on inflation under 2 percent, but the debt-GDP and loan-deposit ratios remain stuck at 80 percent and 110 percent respectively. The central bank has been in rate slashing mode under new leadership on persistent overseas bond and currency inflows, although 10-year auctions at record yields below 5 percent have encountered difficulties amid presumed forint overvaluation. Its latest stability report highlighted a spike in non-performing loans to almost 20 percent of the total despite a raft of company and household foreign exchange conversion and repayment rescheduling schemes.
Industry losses were $700 million in 2012 with Q1 profit at exchange heavyweight OTP down 10 percent. The government has pointed to a solid reserve position at $35 billion and trade surplus in extending hard currency relief to small business heading into the 2014 election period, which helped lift sentiment to a 2-year high as resort to an IMF backstop remained off the table.

Warsaw in contrast renewed its contingency line as the zloty was off 5 percent against the euro and soft retail sales and construction cut the 2013 growth forecast to 1 percent. Interest rate easing has not pulled equities from their slump despite $5 billion in offerings this year to pace Central Europe and spur multinational banking groups to establish underwriting arms. Private pension funds with $85 billion in assets have been reluctant to re-allocate to stocks and especially the one-quarter of listings from elsewhere in the region in view of traditional guidelines and reductions in state contributions to the system to meet deficit targets. Participants fear Hungary’s nationalization precedent and increased funding pressure as in Portugal where 90 percent of the pool goes to government debt needs through 2015. State-run companies there have already reneged on derivative contracts as the economy has shrunk for ten consecutive quarters and 85 percent of the population seeks renegotiation of the troika arrangement. Both the main banks BCP and BPI must repay immediate post-crisis capital injections as corporate NPLs top 10 percent. Depositors panicked after the Cyprus freeze by shifting cash from accounts to vault safekeeping as they were burned by a widely-seen “playing with fire” approach.

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European Central Banks’ Stability Stretch
2013 June 12 by admin

Posted in: Europe
With longer-term EU debate swirling on common banking union twenty years after the “single passport” concept was introduced, research by the Polish central bank and New York-based Center for Financial Stability attempts to rank the 27 member individual supervisors’ current contribution to system protection and reporting. It divides the group into euro and non-euro users and devises an engagement index to measure analytical and infrastructure work beyond traditional monetary policy. Subcomponents include the definition and publication of financial stability reports, cooperation with ministries and parliament, and micro and macro prudential oversight to promote sector health and knowledge. Only the four representatives from France, Germany, Sweden and Latvia do not have this explicit legal mandate, which has usually been strengthened since the 2008 crisis and is described in both broad and narrow terms which can include asset bubble and non-bank contagion monitoring. Risk buildup can encompass numerous causes from negative economic shocks to participants unable to honor obligations. Just one-third of the group releases regular indicators following IMF methodology, although the same number provides their own statistics. Over half conduct and disclose the results of stress tests, with the highly ranked Czech National Bank assessing quarterly. Almost all circulate periodic stability reviews and bulletins, with Cyprus an exception which may have deterred earlier collapse notice spurring outside rescue and stiff depositor charges. Payments network and capital and liquidity rule responsibilities are routine but industry modernization and reform are often carried out with other government arms and indirect tasks like consumer rights may not be covered. The majority of central banks prefer a separate department for coordinating these issues working closely with the line regulators. Out of a maximum 10 score, the average was in the 7 range where the periphery countries now experiencing major stress congregated. Among the top ranked were Slovakia, Lithuania, and the Netherlands while France and Italy were the worst. The paper concludes that existing gaps complicate the challenge of launching the Single Supervisory Mechanism where the ECB may be stretched in its capacity and purview.

Sovereign debt restructuring is another topic where Europe may be preparing a different approach in view of difficulties with market-based procedures cited by both official and private parties during the Greek workout and subsequently in an April IMF Executive Board paper urging reconsideration of recent practice. A European crisis resolution facility established by treaty or EU directive has been urged as a continental version of the global SDRM proposal floated a decade ago to stiff opposition, and the existing ESM pact could be amended to address the power of holdout creditors who received full payment on foreign law bonds while the domestic ones were reduced 75 percent. The submission argues that relief has been “too little and late” and often continues unsustainability, and that collective action and official sector involvement problems remain unsettled.

The African Development Bank’s Live Transformation Circuits
2013 June 10 by admin

Posted in: Africa
On the eve of its annual meeting in Morocco and 50th anniversary in 2014, the African Development Bank tabled a 10-year strategy after numerous consultations emphasizing the environment, infrastructure, agriculture, and regional integration within the context of private-sector led growth and better official and corporate governance. Future financing will stress new methods and partnerships to solidify the continent’s “transformation” over the past decade as a world GDP increase leader and FDI recipient equal to individual BRIC countries. However may states remain fragile with high raw materials dependence, poverty and inequality, youth unemployment and food and water shortages. A “green” shift is overdue as ecological use will double in the next 25 years, and power, sanitation and transport upgrades could lift annual output 2 percent on $100 billion in investment needs. Intra-African trade has doubled to over $100 billion the past five years on $4 billion in Bank-backed cross-border projects, but regulatory barriers continue to impede physical linkages. Midsize firms comprise only one-fifth the workforce as the “missing middle” is pervasive in business and finance. Venture capital, leasing, bonds and equities, credit bureaus and export loans can help fill the gap, and the AfDB can offer its own guarantee and insurance facilities. Public financial management in such areas as debt strategy, fiscal decentralization, and natural resource negotiation should be a priority over the next decade along with skills, training and technology transfer to match global standards. Progress in attaining the 2015 Millennium Development Goals has been sporadic, with half the world’s poor now in Africa after more dramatic Asia breakthroughs. Economies like China can share their experience and also act as long-term investors for climate and social purposes. Sovereign wealth funds in a half-dozen places including Botswana, Mauritius and Nigeria can join efforts supported by the Bank’s AAA rating as other multilateral bodies including the UN and African Union collaborate.

The document was circulated as Ghana which was the pioneer sovereign bond issuer after getting debt relief previewed a $1 billion return in the coming weeks, despite fiscal and current account blowouts and a benchmark interest rate hike over 15 percent to bolster the crumbling cedi. The budget deficit will approach 10 percent of GDP in 2013 on double-digit inflation and a negative ratings outlook. Oil production has not met the original forecast and falling prices are also hurting nearby exporter Gabon, where dollar-denominated yields halved to 3. 5 percent after late coupon payments. Growth and the current account surplus there remain strong, but the opposition continues to sporadically challenge the legitimacy and wealth of the Bongo regime. Nigeria too is expected to tap the external debt market soon as Zenith Bank listed London GDRs. Local paper has seen profit-taking after insertion in the JP Morgan index, and watershed power industry privatization has been overshadowed by the government’s emergency declaration in the north against Boko Haram militants trying to radically transform income and religious tolerance.

India’s Indexed File Markings
2013 June 10 by admin

Posted in: Asia
As rater S&P gave one in three odds of imminent investment grade revocation, Indian inflation-indexed debt was revived on GDP growth at a paltry 5 percent the past fiscal year which helped bring WPI under that level. About $3 billion in 10-year instruments will be auctioned over the coming months which protect coupon payments unlike the previous late 1990s design. The innovation follows a withholding tax cut to 5 percent from the former 20 percent to sustain foreign inflows which have also been strong into equities which are positive through May despite countervailing domestic investor flight and a crackdown on high-speed algorithmic trading. The regulator will audit these firms biannually and they must report software problems immediately or face suspension. On a sector basis, infrastructure has again grabbed headlines as widespread power outages recur and banking has been prominent with a spike in nonperforming loans among big state players as private conglomerates apply for licenses to enter the field under recent liberalization. The India-born ex-chief executive of Citigroup has joined a local team for the prize, and the big listed family groups like Reliance and Tata are also in line. After the telecoms payoff scandal which nearly toppled the government the Finance Minister promises a corruption-free transparent process for final awards expected in 2014 just before the next election round. The ruling coalition has launched an ad campaign in advance touting anti-poverty and income strides, as the opposition BJP remains fractured and unpopular as evidenced by poor showings in provincial polls. Prime Minister Singh after winning a second term has been broadly criticized for lack of leadership at home and a visit by his Chinese counterpart in May failed to yield diplomatic breakthroughs. India runs a large bilateral trade deficit and mainland cross-border investment pledges have come to less than $1 billion on perennial delays and disputes. However with commerce due to reach $100 billion by 2015, several Indian banks have opened Chinese branches after mutual supervisory approvals. After passing legislation on retail joint ventures and insurance dozens of bills are still stuck in parliament to otherwise overhaul FDI, which is regularly subject to retroactive tax claims as in the $2. 5 billion Vodafone case.

With the lackluster economic growth figure commentators have urged technocrats in charge to devise a fresh model to avoid backsliding to the crisis-riddled “Hindu rate” two decades ago. The search extends to other regions notably with Brazil’s struggle for a post-Lula path as a senior finance official recently resigned in protest over interventionist policies. QI GDP was up only 0. 5 percent and above-target inflation prompted a 50 basis point benchmark rate hike on investment still under 20 percent of output despite massive infrastructure building needs. In the period oil giant Petrobras managed to borrow over $10 billion abroad but that tab’s color code has been flashing.

Global Capital’s Latent Lab Transformation
2013 June 4 by admin

Posted in: General Emerging Markets
The World Bank’s Global Development Horizons series extrapolating developing country trends to 2030 detailed two “economic laboratory” scenarios for savings and investment which envision an average 90 percent contribution to global growth, with the group also representing half of trade activity and generating 60 percent of jobs through services. Currently their domestic saving/GDP level is 33 percent and 45 percent of the world total. Under a rapid convergence path with institutional and structural progress financial markets in big emerging economies and the Middle East will attain development comparable to the 1980s US, the publication posits. In fifteen years, $150 trillion or half the global capital stock will be in developing nations but income inequality may still be pronounced internally without education or anti-poverty programs. Sub-Sahara Africa with its youth bulge will be the only region where savings continues to increase beyond that time as Asia, Europe and Latin America taper. China’s holdings will top the charts at $9 trillion followed by India’s $1. 5 trillion, and they will drive almost 40 percent of gross investment in the coming decades concentrating on infrastructure where the annual bill will exceed $850 billion. The non-industrial portion of capital flows will double to 50 percent, but no single country will dominate and South-South direction will be a major private and official channel. With greater integration global monetary policy must be “adjusted” to reflect bilateral and multilateral coordination challenges, regardless of eventual currency composition as the renimbi and other units assume larger roles. Alignment of international banking regulation will remain important but securities market promotion and financial system diversification are at early stages in many countries lagging projected household and corporate demand, the research concludes.

Chinese officials have promised an “operational plan” for capital account convertibility by year-end and imposed stricter rules for bank foreign exchange exposure. In the local government sector the regulator announced outstanding loans were 15 percent of the total and banned bond guarantees. Ratings agencies expect an NPL rise as balance sheet deterioration may also come from wealth management products at one-tenth of assets. The PMI is stuck in the 50-51 range as GDP growth slackens to 7. 5 percent despite a 5 percent April home price jump. The World Bank along with its long-term perspective issued an immediate warning on likely Asian asset bubbles from Japan’s landmark quantitative easing, despite repatriation extending from the end-March fiscal year. Institutional investors polled intend to maintain current allocation strategy and insist incremental moves abroad will be hedged with record yen volatility. Retail emerging market flows through trusts are expected to jump around $10 billion annually but appetite has been mixed with heavy Brazilian focus resulting in disappointment. Neighboring Australia had been a popular developed-world commodity currency play until the central bank cut rates placing the local dollar under the microscope.

Korea’s Brooding Ballistic Responses
2013 June 4 by admin

Posted in: Asia
Korean stocks continued to struggle despite good first quarter 3. 5 percent GDP growth as relentless won appreciation to the 1000 per dollar line raised export fears alongside the geopolitical ones with the North threatening further missile launches and dismantling border joint ventures. Japanese ties were also frayed as the yen’s double-digit plunge under Abenomics was aggravated by his military honors at a World War II shrine amid a sharp bilateral tourism drop. President Park began a US visit to re-affirm security and trade alliances and maintain foreign capital inflows on slipping conglomerate earnings following Woongjin’s bankruptcy just as she entered office. Electronics could accompany construction and shipbuilding into the doldrums as the president unveiled $15 billion in budget stimulus before her trip raising public debt above 35 percent of GDP. It targets job creation and subsidies but spurns additional housing breaks with family debt already at 150 percent of income. With this load the central bank will stay cautious on reducing rates even as Tokyo’s record easing solidifies the zero bound there. A handful of Seoul analysts argue that retail and institutional money could shift into won assets to bridge the currency differential but trust and life insurer data have yet to show allocations. Through the end-March fiscal year insurers’ 45 percent weighting in JGBs was unchanged and they demand hedging facilities for any move abroad. For individual participants in the toshin and Uridashi segments other Asian markets are more popular and diversification to Europe and Latin America is also a prevailing trend. They are also wary of regular Korean intervention and taxes and inflow restrictions which complicate returns alongside the historically tense relationship.

The rivalry extends to Indochina where both countries have deployed stock exchange and development agencies for financial sector technical assistance. Vietnam is the only MSCI frontier index member with solid gains this year as credit growth is in single digits with state banking cleanup receiving attention at minimum 10-15 percent NPL levels. GDP growth should again be 5 percent on inflation around 7 percent allowing for further benchmark interest rate cuts. With foreign exchange reserves replenished to $25 billion dollar and gold flight has abated and annual commercial external debt repayment is only $150 million. Aid, remittances and FDI continue to offset the trade deficit, and the Vinashin default and recent sovereign downgrade have faded from memory as investors await fresh issuance. In Myanmar securities market launch is part of broader reforms including monetary authority independence and private commercial bank opening. The central bank will use Treasury bills to manage liquidity and end budget deficit financing. China and Hong Kong have been the major backers of oil and gas projects with the military-run state monopoly but the lifting of sanctions and a new investment regime will spread the takeoff base.

Argentina’s Historic Holdout Histrionics
2013 May 30 by admin

Posted in: Latin America/Caribbean
As Argentine stocks and bonds firmed awaiting the US Appeals court verdict on distressed fund exchange instrument repayment and pari passu clause interpretation, Moody’s released an overview of the past 15 years’ restructuring experience highlighting the case’s singularity. It found typically rapid workouts without creditor coordination difficulties or litigation in 35 examples across all emerging market regions. Only 3 other offers, in Cote D’Ivoire, the Dominican Republic and Russia took more than a year to complete, with civil war delaying the first and official lender negotiations slowing the last two. Creditor participation averaged 95 percent, with only Dominica confronting holdouts who later agreed to join. Outside Argentina just four court complaints were filed for the same number of countries, and litigation was not continuous. The complexity may have contributed to regular disputes, as the swap featured 150 bonds, and a half dozen governing laws and currencies and a diverse retail and institutional investor base. The default and 70 percent loss imposed correlates with a longer closing time. One-third of the deals had collective action provisions and exit consents for majority decision, with the latter changing non-financial terms in the tendered paper. As to the current battle with Elliott Management which again rejected an offer along 2010 lines in light of the “lock law” barring improvements, observers continue to predict a negative ruling which may be mollified by staggered repayments excluding full past due interest. The option of establishing offshore routing for existing bondholders to avoid collection may not be available with covenant and logistical constraints, and a Supreme Court petition would likely be denied in the absence of constitutional issues unless the US executive branch would insist on the sovereign immunity and other determinations. Washington has already split engagement as it supported Argentina’s original New York filings but votes against development bank loans for investor-unfriendly policies which are also the target of legislation which advanced in the past Congress to ban capital market access altogether. Diplomatic protests have been lodged recently over President Christina Fernandez’s push for stricter media and judiciary control ahead of October elections, and the lack of progress on resolving YPF claims a year after Spanish assets were expropriated. Joint venture talks by oil giant Chevron have foundered on the impasse and environmental damages it faces in neighboring Ecuador.

The company intends to raise funds through tax amnesty promoting capital repatriation as foreign reserves dip below $40 billion with continued flight. The informal market peso premium has been double the official setting as lower soybean prices may dent the trade account. The primary budget surplus has disappeared and privately-forecast inflation is above 25 percent as the Commerce Minister admitted it as a “problem. ” Reporting will not change soon to satisfy IMF statistical objections and a decade of Paris Club obligations remain outstanding as the stage fighting endures.

South Africa’s Unsecured Loan Lemmings
2013 May 30 by admin

Posted in: Africa
South African shares continued to sputter and the rand breached 10 to the dollar as mine workers entered wage negotiations with hard compensation and nationalization tracks and African Bank and other unsecured lenders reported record impairments on downscale household lines. The industry’s main union demands a double-digit salary hike far outpacing the government’s inflation plus 1 percent deal last year. Another round of strikes has begun after recent violence as ANC ruling party activists press a “radical economic shift” to lift the 10 percent black ownership stake. The renewed confrontation comes as precious metals which account for over half of exports experience sudden world price reversal which could aggravate the 6. 5 percent of GDP current account deficit, although lower oil import costs will steady the balance. Through April $12 billion in bond inflows have poured in to bridge the divide, a clip equal to all of 2012 which Finance Minister Gordhan regularly cites as a monitoring priority. The central bank is expected to ease on 3 percent Q1 growth and CPI inflation at 5. 5 percent under a revised method with business and consumer confidence in the doldrums. In addition to the uncollateralized credit deterioration, mainstream mortgage activity is flat after a decade-long boom as the big four banks suffered high single-digit default rates. The bonds issued to support the franchise fell by half to R17 billion through April and looming power shortages for the imminent Southern Hemisphere winter will further hurt borrowers. State monopoly Eskom plans to schedule interruptions as it faces maintenance backlogs and new plant construction delays. Renewable energy got over $5 billion in investment last year but has been slow to join the grid, according to advocates who helped host the 2011 UN climate summit in Durban. The utility’s financial drain weighs on the sovereign rating as the fiscal deficit is stuck at 5 percent on output undermining traditional discipline as overdue health and pension reforms are prepared.

Neighboring Zambia may also have to rethink Eurobond objectives as one agency assigned a negative outlook on copper price correction and “policy uncertainty,” including introduction of capital controls as a nominal tax avoidance measure after kwacha use was made compulsory for routine transactions. Export proceeds above $10,000 must now be repatriated within two months and offshore transfers require full documentation. The Sata administration claims mining group manipulations deprive it of an estimated $2 billion as it also precluded South African bank takeover of a local unit. Foreign investment rose 30 percent to $1. 7 billion in 2012 and has often been accompanied by controversies such as a labor dispute with Chinese operators ending in killing and investigation by the UK’s serious fraud office of London-listed ENRC’s acquisition of metal properties. The President himself with the nickname “king cobra” has been accused of strangling political opposition as the Commonwealth of former British affiliates has recoiled at practices.

The UAE’s Towering Debt Tip-Over
2013 May 29 by admin

Posted in: MENA
The UAE triumphed over MENA stock markets with a 45 percent gain through May after a flurry of big debt restructurings, property turnaround, and repayment of bank funds borrowed after the 2008 crisis. The Amlak arm of Islamic developer Emaar proposed a 15-year loan extension and 30 percent reduction to its creditor committee including Standard Chartered alongside Emirates NBD and other local units. In the biggest deal since Dubai World, Dubai Group also owned by the royal family set final terms for $6 billion outstanding after several lenders initially balked at a dozen year wait for reimbursement. Under the agreement they will get almost 20 cents to the dollar upfront and after the announcement CDS spreads dipped to 185 basis points. The breakthrough overshadowed backlash in the longer-running DW saga with calls for faster asset disposal to meet the 2015 $4. 5 billion deadline. Hotels and casinos are on the block but the government prefers patience to avoid large discounts. The tribunal hearing the conglomerate’s cases intends to handle the remaining load by next year, as Abu Dhabi separately lunched its own legal and regulatory scaffolding for a free zone financial hub. In the tiny Sharjah emirate Dana Gas also completed the final arrangements for rescheduling its $900 million sukuk after Egypt and Iraq did not honor contracts. Banks have been able to issue bonds at oversubscribed 3 percent-range yields as credit growth again picks up marginally after the central bank recently eased mortgage exposure caps. Leading Gulf exchange Saudi Arabia rose 5 percent as the money supply increases at a double-digit pace and the new US-trained capital markets supervisor reportedly prepares direct external opening that could merit MSCI core universe standing. Oil output is down to 9 million barrels/day with the price around $100 as Fitch upheld its AA- minus sovereign rating on an estimated 8 percent of GDP budget surplus and $650 billion in foreign reserves. Food and rent-driven inflation improved to 4 percent as the King embarked on a massive home-building scheme and inaugurated the $10 billion Riyadh financial district which will host a cross-section of domestic and foreign tenants despite steep rents.

Qatar registered a similar advance as it too awaits index graduation, with public sector credit up 30 percent to cover massive hydrocarbon, World Cup, and infrastructure projects. After 6 percent growth last year the budget surplus has evaporated with cost overruns such as with the new $15 billion Doha airport. Rail and subway networks will provide over 100,000 jobs to quell youth discontent, as the sovereign wealth fund takes stakes in a host of industrial and emerging market banks and the government likewise wields influence abroad as the largest bilateral backers of Egypt’s Muslim Brotherhood regime and Syria’s rebels. At $8 billion since President Mubarak was ousted two years ago, the Cairo commitment is roughly double the mooted IMF facility again postponed until parliamentary elections break ground.

Malta’s Ambivalent Anti-Crisis Crusade
2013 May 29 by admin

Posted in: Europe
Maltese bonds and stocks rebounded from immediate post-Cyprus jitters but the offshore center’s struggle was highlighted by the IMF’s annual Article IV checkup flagging “uncomfortably high” public debt and meager growth at less than 1 percent last year. The island’s international banking sector has limited local economy exposure but domestic units are experiencing a construction and real estate nonperforming loan spike. Provision coverage is low and the deposit insurance and resolution frameworks need updating despite solid capital, earnings and liquidity indicators heading into the Basel III regime. The fiscal deficit was 3. 5 percent of GDP in 2012 and sustainability will require government worker and health cutbacks and reduced support for state-owned enterprises especially the airline. Energy outlays are another drain and oil diversification should be a priority according to the Fund. Pension changes including a higher retirement age are overdue and the competitiveness model is too reliant on financial and gaming services ignoring productivity and training gaps and potential EU-wide tax harmonization. The report was issued as Cyprus received the first installment of its EUR 10 billion official package after parliament approved it by only two votes. Output will fall double-digits this year and capital controls will stay in place over the summer on the 85 percent debt-GDP ratio. An estimated 60 percent of the surviving big state bank’s uninsured deposits are slated for recapitalization as accountholder withdrawal continues. With tourist arrivals down 10 percent in March, the current account shortfall will exceed 10 percent of national income as the communist party which lost power vows to press the case for euro exit. Slovenia, another small single currency user, spurned the rescue option after raising $3. 5 billion in a delayed dual-tranche external bond offer. Ratings agency S&P calculates that the entire amount will be needed to strengthen the trio of ailing banks led by NLB which previously failed an unexacting regional stress test. Moody’s slashed the sovereign grade to junk as over half the citizenry in an opinion poll thought a bailout was imminent. Recession lingers with a 5 percent of GDP budget hole, and the new administration’s plan to sell a handful of public firms to bridge it was greeted with investor skepticism in light of former tries stymied by labor and political opposition.

Greece has already admitted the urgency of further capital replenishment after getting EUR 40 billion for a stability fund, as Alpha and NBG seek private investor backing after a government bond rally bringing 10-year yields to single digits from 30 percent a year ago. Hedge funds have poured into high-yield corporate debt as the lottery operator was divested for EUR 650 million in the “first major privatization” according to the Finance Ministry. A law was finally passed to shed tens of thousands of civil servants to comply with Troika demands releasing scheduled aid as shrinking credit still awaits a white knight.

Malaysia’s Reluctant Razak-Edge Margin
2013 May 23 by admin

Posted in: Asia
Malaysian shares and the currency which have lagged ASEAN peers climbed on Prime Minister Najib Razak’s National Front narrow re-election victory after opinion surveys showed an even battle with the opposition headed by former finance minister Anwar Ibrahim which actually won the popular vote. The ruling coalition again lost seats and remains far short of the supermajority needed to enact constitutional changes, and was on the defensive throughout the campaign on ending pro-Malay educational and economic preferences and promoting better relations with ethnic Chinese and Indians. First-time young voters also showed disaffection with the status quo although they did not decisively swing toward challengers unable to articulate clear policy alternatives. In the stretch before the balloting several sideshows emerged with longtime leader Mahathir approaching the age of 90 taunting Anwar to jail him if he took power and the government criticized for engaging Goldman Sachs for $6. 5 billion in private bond deals which entailed $200 million in fees. The firm has ties dating back decades and claims it exercised “high global standards” meriting selection. Two transactions were on behalf of a sovereign wealth fund emphasizing Islamic finance, where a cross-border insurance push is now prominent to supplement banking and securities activity. Takaful operations were recently granted full license to invest abroad after a previous 80 percent local assets mandate. GDP growth supported by domestic demand should be 5 percent this year as electronic exports flag, but budget plans to curb subsidies could dampen consumption and lift inflation to the 3 percent range. The central bank may be forced to tighten as it otherwise considers personal borrowing limits with credit at almost 120 percent of GDP. The current account surplus in turn may dip to 4 percent of GDP on softer commodity earning as plantations begin to send home immigrant labor facing domestic worker backlash.

Indonesia has entered the 2014 election season with no clear successor to two-term incumbent SBY as he tries to clear the sensitive issue of fuel subsidy adjustment from the agenda in advance. The sovereign ratings outlook was cut on the problem’s competing fiscal and inflation pressures and worsening balance of payments figures with a persistent hydrocarbons deficit and an agricultural import surge which prompted quota imposition especially for garlic and onions. Foreign exchange reserves are below $100 billion as portfolio investors hesitate with steep stock exchange valuations and bond market interventions. Golkar party leader Bakrie has stepped into the presidential race on a platform to instill business confidence, but his family-run conglomerate’s track record remains controversial as anti-corruption investigators have yet to capture major suspected cronies. The elusive results there are increasingly contrasted with the Philippines, where President Aquino’s good governance enforcement has been instrumental in an investment-grade designation by a second agency. S&P cited fiscal and remittance prods along with the disadvantage of low per-capita income which could shave future promotion.

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Mexico’s Momentary Modernization Muddle
2013 May 23 by admin

Posted in: Latin America/Caribbean
Mexican shares swooned briefly just before a trip by US President Obama to hail the country’s “moment” as in the popular slogan as the multi-party structural reform pact signed post-election foundered on corruption allegations to stymie banking legislation. The tempest over local vote-buying passed to maintain the agreement especially vital for constitutional revisions accompanying private partnership and tax changes at state oil monopoly Pemex. Domestic demand weakness may limit GDP growth to 3 percent this year as the central bank cut rates for the first time since 2009 despite a food-induced inflation spike to almost 5 percent. The peso continues to strengthen around the 12 to the dollar level as foreign holdings of domestic government bonds have doubled to 55 percent of the total and external sovereign issues for liability management purposes command below 3 percent yields. Currency intervention remains off the table although authorities may consider reactivating a regular options facility. Private pension funds with over $150 billion in assets have moved increasingly into equities where special structured products are available and a trickle of IPOs are in the pipeline after a lengthy drought. Bank listings could be boosted by the new law intended to accelerate single-digit credit growth and small business access. However corporate debt continues to be a rocky area as defaults spread particularly among homebuilders like Homex caught in the aftermath of a subsidized apartment slump. Their problems widened high-yield spreads on JP Morgan’s CEMBI where the overall benchmark is now at 350 basis points over Treasuries.

Brazil’s banks led by state-run units continue to increase lending at an annual double-digit clip and the insurance arm of Bank of Brazil went public in a $5 billion transaction but the stock market remains down over 10 percent on a 12-month basis. NPLs are about 5 percent of the total as household debt stands now at almost half of disposable income and the giant government institutions BNDES and Caixa were recently downgraded by ratings firms on company and individual exposures. President Dilma Rousseff has not formally signaled her desire for another term in 2014 as the economy shows signs of stagflation. GDP growth is put at 2-3 percent this year and inflation at 6.