No More Learning

Trade with leading partner China, at $50 billion in 2014, has also suffered with slowdown there, and state banks no longer seem in a hurry to enter as they grapple with worsening credit and capital market outlooks at home. The World Bank in a special report described potential doubling of GDP growth from the 2. 5 percent reported the past year ending in March, and “windfall” living standard gains with future normalization, but stipulated that fiscal and monetary policies must also change.

The government controls an estimated 70 percent of the economy, and in the past decade almost $50 billion in state-owned company shares have been sold off, according to the Iran Privatization Organization. However these transactions have left intact majority ownership by official pension funds, industrial conglomerates, religious foundations and the Revolutionary Guard, with private sector stockholders unable to influence operations and management. Of the $90 billion market capitalization, the “free float” may be only one-third and just a fraction of the 300 firms listed are actively traded. Foreign investor access was allowed just five years ago and according to the head of the Tehran bourse, hundreds of individuals and institutions have applied for licenses.

A handful of London-based frontier market specialists like Charlemagne Capital have tied up with local brokers to launch international funds as the International Atomic Energy Agency inspection process begins this month. They tout the large $500 billion output and 80 million population, and consumer segment in particular, despite retail sales decline in the months since the nuclear agreement. Exchange rate unification between the formal and parallel rates is also assumed as recommended by the IMF, although authorities have not offered a specific timetable, and promoters also believe the single-digit inflation target can be met after it was halved to 15 percent the latest fiscal year.

At the Bretton Woods institutions’ gathering in Lima, Iran’s Finance Minister pledged capital market deepening and banking system cleanup, and hinted at a return to sovereign external bond markets as in the early 2000s. The credit rating then was high speculative grade and global agency Fitch maintained coverage until the 2008 crisis anticipating further issuance. Domestically the first Treasury bills were offered in September, as $300 million in sharia-compliant instruments went through the small over-the-counter market, the Fara Bourse. The borrowing is for past contractor obligations, and face value quickly fell to a steep discount on the above 20 percent yield. Dealers expect additional operations to alleviate the existing credit crunch, as banks try to grapple with their 15 percent non-performing loan ratio by local accounting standards. They reported a 20 percent earnings decline in the last fiscal year and now must offer 25 percent annual returns to attract deposits and sell off property holdings under stricter prudential rules. President Rouhani convened a conference on banking reform and rescue before the nuclear deal was struck, and in the absence of major steps a liquidity squeeze is imminent. The expected first release of frozen accounts in early 2016 will be around $30 billion and used mainly for $150 billion in infrastructure projects, according to Iranian representatives at the IMF meeting as the non-sanctions financial system stalemate continues to block a share rally.

Originally published on Asia Times www. atimes. com

Peru’s Hesitant Host Gestures
2015 October 22 by admin

Posted in: Latin America/Caribbean
The IMF-World Bank annual meetings in Peru could not shake it MSCI stock market component from its lethargy, as a frontier rung downgrade may be imminent on “low liquidity,” with the Andean reading down 25 percent including Chile and Colombia through September on a general sub-region snub. Lima stock exchange officials were in New York prior to the conference in a campaign to stay in the core index, but with only three listings investor support was lukewarm. The visit coincided with an escalating dispute with hedge fund Gramercy over repayment of 40-year old Agrarian Reform Bonds issued as nationalization compensation. Their face value is marginal but local courts ordered an adjustment in 2013 which would set their value at just one-tenth the $5 billion creditors claim and may press in an action under the US-Peru free trade agreement, which would be superseded by the TPP signed in October and awaiting ratification by the dozen member countries. Finance Minister Segura reiterated that the government will follow the judicial decision, which also permits reimbursement delay through end-decade and subordinates foreign investors to domestic landowners.

The issue has not entered the 2016 presidential contest, with centrist candidates backing the current broad economic direction of counter-cyclical fiscal policy with 2 percent GDP growth from commodity collapse. The El Nino weather pattern could further batter fishing and agriculture, as copper and mining projects remain under pressure from indigenous community and environmental protests and retrenchment by global industry giants like Glencore. As TPP passage will include currency discussions and as the US Treasury Department tries to finesse the “manipulation” debate, the central bank’s regular “smoothing” operations and financial system de-dollarization measure may come under scrutiny. Banks were ordered to cut dollar loans and pension funds had to pare FX derivative positions, and repo exchanges were introduced to corral greenbacks. Double-digit annual credit growth continues due mainly to conversions, as Basel III rules are phased in after a pre-IMF meeting 25 basis point benchmark rate hike. Foreign holdings of local Treasury bills have in turn tumbled from 60 percent to 40 percent of the total as monetary authorities look to increase control.

Chile and Colombia, with their respective stock markets off 20 percent and 40 percent through Q3, have also marginally raised rates mainly to fight depreciation-induced inflation. Colombian prices were up 4 percent in the first half on 3 percent GDP growth, with unemployment falling to single digits. A deal with FARC guerillas was announced but the fiscal implications have not been clarified as the Santos administration prepares another adjustment package by year-end. The first round of the multi-year $20 billion 4G infrastructure program is due to close soon, and can partially offset the oil and gas sector slide which has hurt state-owned Ecopetrol’s share value and divestiture plans and spurred Pacific Rubiales’ bond default. Chile’s growth is only 2 percent, and the government’s labor reform push to give unions more power has provoked a business backlash that may further subdue investment into 2016. The bank NPL ratio is 3 percent but is slated to jump with tougher provisioning standards especially for high loan-to-value mortgages following another natural earthquake which may have interrupted copper capacity.

Central Asia’s Stunted Succession Syndrome
2015 October 22 by admin

Posted in: Asia
The IMF joined the Asian Development Bank in downgrading GDP growth forecasts for Central Asia and the Caucuses this year and next, as they warned of worsening commodity and remittance flows from neighbors Russia and China and domestic public investment capacity. The ADB predicts less than 3. 5 percent expansion in 2015 and just 4 percent in 2016, with inflation at roughly double these levels following Kazakhstan’s 33 percent devaluation from August-September. The current account deficit will widen to 3. 5 percent of GDP as Azerbaijan’s surplus is halved, and regional oil and metal exports will remain muted. Kazakhstan was at the bottom of the MSCI Frontier Index with a 50 percent loss through September, and Belarus external bonds were unmoved by President Lukashenko’s romp to another term without Western election observers as the economy contracted 4 percent through July. The EU may relax sanctions after the President quashed reported Russian plan to build a military base, and he has also conducted talks with the IMF over a possible program and taken a $50 million power plant loan from China’s Export-Import Bank. Tiny Kyrgyzstan tried to break the authoritarian mold after entering Moscow’s Eurasia Economic Union in May, but many candidates for parliament were disqualified as President Atambaev’s Social Democratic party led the vote for another fragile coalition. Seats were openly for sale and rival groups resorted to violent attacks, with the new government facing a 50 percent debt-GDP load and faltering donor support.

Kazakhstan’s record $2. 5 billion global bond placement momentum in July was halted by the peg abandonment the next month, and the central bank has intervened $150 million daily to prevent drift toward 300 tenge/dollar. Recession could hit in the last quarter after industrial and mining output fell 5 percent before the adjustment. Agriculture is flat and rural unrest was a previous threat to President Nazarbaev’s grip as security forces broke up demonstrations. Foreign investors had been prepared for further depreciation but not outright floating and were also dismayed by murky ownership shifts at another state-owned London listing. The region’s other oil power Azerbaijan heads into November parliamentary elections with GDP growth slowing to 4 percent as the June European game construction push fades, and the manat is still under pressure after February’s reset. Official reserves fell $1 billion in August to $7. 5 billion, but the sovereign wealth fund at half of GDP provides additional cushion. Banking system dollarization has stabilized at two-thirds of business and personal deposits, but political jitters could accelerate flight after the polls as President Aliev receives continued international condemnation for opposition and media arrests.

Georgia has been demoted to underweight in JP Morgan NEXGEM recommendations, with remittances from Russia off 35 percent on an annual basis leaving a 7 percent of GDP current account gap. Moscow criticized establishment of a NATO training facility and signed a pact with unrecognized South Ossetia. Economic growth has flagged to 2. 5 percent and inflation is above the 5 percent target with devaluation’s pass-through and higher electricity prices. The central bank lifted rates again 100 basis points to 7 percent as minor improvement in global competitiveness rankings was unable to boost expatriate and local worker sentiment.

Corporate Leverage’s Hectic Hoist
2015 October 13 by admin

Posted in: General Emerging Markets
The IMF’s October Global Financial Stability Report probed the massive run-up in EM corporate debt ahead of the annual meetings and flagged cyclical and structural dangers as global liquidity abundance fades. It more than quadrupled to $18 trillion in 2014 and rose on average 25 percent in relation to GDP. Bonds are now 17 percent of the total, and although maturities are longer than with bank loans the instruments are also more volatile. After reviewing data sets for both big and small and state and private firms, the publication cites rising leverage across regions and sectors. Construction companies in China and Latin America loaded up on debt along with mining and oil and gas ones globally, and they also added foreign exchange exposure. The interest coverage ratio is below 3 and worsened since the 2008 crisis, and borrowing proceeds have gone for less-profitable projects. One-third of emerging economies have increased bond issuance at the same time the number of participants has decreased and activity is masked though offshore subsidiary use. It entails weaker monitoring that may promote “excess risk taking” and mutual fund investment structures can reinforce swings. Countries like Colombia, Malaysia, and Russia have placed proportionately more in local currency but dollar and euro resort has risen to almost half the outstanding sum ex-China. In the past five years company liquidity and solvency have “broadly deteriorated” but issuance terms have improved, with tenors stretched a year at lower yields. Domestic factors have become less important in these trends, and regression analysis also shows a close correlation between CEMBI and US corporate spreads.

The research urges near-term preparation for reduced market access and higher debt-servicing costs, and bankruptcy regime reform to enable faster resolution. Banking and securities regulators should consider macro and micro prudential measures, including exposure limits and stricter capital standards, and they must regularly conduct and share public versions of stress tests. China is an outsize case where real estate and construction leverage has almost been matched in mining and utilities, and state-owned enterprises dominate borrowing with declining financial ratios. Just a 1 percent interest rate rise would represent a sufficient shock to force future write-offs, and the analysis was completed before the mainland stock market intervention choking equity alternatives. In the medium term tax treatment favoring debt could be changed and data gaps combining local and overseas transactions must be bridged to enable accurate surveillance. During the 2013 Fed-prompted outflow period more leveraged and smaller firms saw debt costs spike and a “more disruptive” scenario is now plausible which could force central banks to provide emergency lines, the Fund concludes.

In a companion chapter bond market liquidity in both advanced and developing economies is examined and while newly-imposed regulatory constraints may not be decisive it points out that business, technological and dealer shifts may heighten fragility. Bid-ask spreads for emerging market investment-grade bonds were 0. 20 at the end of 2014 and had increased faster than in developed markets. The EU’s ban on “naked” CDS dried up normal hedges, and EM currencies have become more liquid at the same time bond dealing may be less resilient though it is not yet “alarming,” according to the rescue brigade’s industry advisors.

Saudi Arabia’s Plaintive Pilgrimage Plot
2015 October 13 by admin

Posted in: MENA
Consecutive Mecca tragedies, with a large crane collapse and stampede killing hundreds of worshipers around the annual haj pilgrimage, coincided with continued decline in the Gulf’s biggest stock market after minor foreign investor opening as the 30-year old peg to the dollar also came under unaccustomed strain following China’s regime change. Ishares went ahead to launch a dedicated country ETF on the assumption it could enter the main index with a tiny weight in 2017. Fund house Invesco completed an upbeat survey, with 60 percent of respondents predicting near term inflows into the $570 billion exchange despite the initial 10 percent international ownership cap. The government has begun a spending review to slash the 20 percent of GDP budget gap and has resumed local bond issues and may impose land and value-added taxes. Growth will continue around 2. 5 percent next year with soft oil prices, and fuel subsidies may be reduced as in the UAE, as the costs of the Yemen bombing campaign escalate along with geopolitical tensions with Iran supporting Houti rebels. Call options in the peg foresee a dip to 3. 8/dollar in the face of regular central bank spot and forward market intervention, and while an outright break is unlikely a recalibration has been on the agenda since the 2008 crisis, when neighboring Kuwait altered the regional formula to manage more flexibly against a currency basket. Since the Iran nuclear sanctions deal with its partners was announced and overcame opposition in the US Congress, the Tehran Stock exchange has lost momentum on realization that current business prospects are poor and may not be remedied with an estimated $50-billion plus in immediate account unfreezing. The average price/earnings ratio is below 6 as listed companies project 50 percent lower earnings, with the commodities sector outlook particularly grim. Hydrocarbon industry investment needs alone amount to hundreds of billions of dollars in the medium term and the Rouhani administration has pledged large sums for urgent infrastructure and banking overhauls. Non-performing loans are reported at 15 percent but would be higher with international classification standards according to the IMF, and real estate has also crashed as a supplemental support to bank balance sheets. Multinational banks are wary of reentry after paying record penalties for skirting the UN boycott, and would have to comply with complex Sharia-compliant rules unlike Islamic finance approaches elsewhere.

Kuwait as the largest MSCI frontier market also shed-double digits as it prepared a sukuk framework for budget borrowing. For the GCC first half volume of conventional and Islamic bonds was $48 billion, a 15 percent drop from 2014. Outside central banks, UAE names were most active as many buyers argue that a diversified economic base and fuel subsidy elimination better position them for a post-oil era. Egyptian shares got scant lift from a “supergiant” offshore gas find by Italy’s ENI, with the MSCI core gauge off 20 percent ahead of long-delayed parliamentary polls. President al-Sisi ordered harsher measures against corruption and dissent and reshuffled his cabinet after the Agriculture Minister was accused of kickbacks. Another Eurobond tap is scheduled as the global peg panic has the pound in the crosshairs for further weakening past 8/dollar over strongman objections.

Ghana’s Unguaranteed Attitude Adjustment
2015 October 6 by admin

Posted in: Africa
Ghanaian shares and the currency were down over 20 percent as a $1 billion sovereign bond return was prepared with a $400 million World Bank guarantee, with inflation and the fiscal deficit clearly breaching the respective 10 percent and 7 percent of GDP targets under the $1 billion IMF program. Fitch Ratings affirmed its “B” mark as it predicted 3 percent growth and warned of overspending ahead of next year’s elections. Another issue could come later in 2015 with investors demanding 10 percent plus yield even with the multilateral backing. The central bank raised the benchmark rate at home to 25 percent in a monetary squeeze which has soured business and consumer sentiment along with half and full-day power cuts. Key commodity export prices have been flat, and public debt/output is now 70 percent as the EU and other donors have been invited back with departure from the previous middle-income track. The government has retained its billion dollar syndicated loan facility for the cocoa authority, but farming income continues to plummet with the local bag take at half the world price. A labor shortage also looms with family plots no longer maintained by children seeking jobs in major cities or abroad. Zambia’s currency has fallen over 30 percent following its debt sale and ratings downgrade, as Chinese and international copper mines suspended operations with the 20 percent decline in global value and erratic electricity. The metal accounts for 70 percent of export and 30 percent of budget revenue, as the deficit will likely exceed 10 percent of GDP this year according to S&P. Royalty treatment has swung between extremes since the Patriotic Front party gained power and another election will be held next year to permanently replace deceased former president Sata. Interim successor Lungu has ruled out IMF resort after earlier overtures and may impose exchange controls even though top economic officials are opposed. Drought has reduced hydro-power supplies to the national grid and also hurt agriculture and the state electricity company has indefinitely shelved borrowing plans.

Nigeria already has currency restrictions which resulted in expulsion from JP Morgan’s domestic bond index, although foreign investor positions have long been minimal. The central bank is trying to hold the formal line at 200 naira/dollar, as it also drained liquidity with its single treasury account campaign designed to consolidate all banking relationships and uncover fraud. The policy rate was kept at 13 percent at the latest meeting but reserve requirements were eased 5 percent to 25 percent. Governor Emefiele blasted the index removal as he cited daily foreign exchange trading around $400 million, but the sponsor had previously put officials on notice that the process was too cumbersome. President Buhari defended the naira protection as reserves fell to $30 billion, and repeated his campaign pledge of political and economic stability as leading cabinet members are due to be named. At the opposite scale of market size the island of Mauritius has declined double-digits on the MSCI frontier index due to its own and India’s foibles. A money-laundering scandal implicated the business elite and offshore financial services have floundered with uncertain tax direction from Delhi as it cannot guarantee a stop to retroactive audits.

Asia Bonds’ Dreaded Destabilization Encore
2015 October 6 by admin

Posted in: Asia
The Asian Development Bank’s September bond monitor profiled a 5 percent rise in Q2 in local instruments outstanding to $8. 6 trillion, while warning of the cumulative “destabilization “ effects of fund outflows, currency depreciation, low commodity prices and high corporate leverage in a more serious replay of 2013’s taper tantrum. The publication presented data and trends through July, before China’s 2 percent devaluation and the Federal Reserve’s rate hike pass, with issuance up in only half the nine markets. China and Korea dominate with respective amounts at $5. 6 trillion and $1. 7 trillion, followed by Malaysia and Thailand each with $285 billion. Indonesia and the Philippines are over $100 billion, and Vietnam is the smallest at $45 billion. The government segment accounts for 40 percent in the region or $5. 2 trillion and the corporate one is $3. 4 trillion, over 85 percent from China and Korea. As a fraction of GDP the market is 60 percent and foreign investors hold over one-third in Indonesia and Malaysia and 10-15 percent in Korea and Thailand. July outflows for the three main countries were $3. 5 billion, and Hong Kong and Singapore increased Q2 exchange rate-related activity. Intra-regional placement came to $3. 5 billion as Korean banks issued in renimbi, Malaysian ones in Sing dollars and Laos’ sovereign was in baht. Hard currency sales were around the same pace as last year at almost $125 billion, with China’s contribution $70 billion, half from banks. The Philippines had a $2 billion sovereign bond, and Malaysia’s conventional and sukuk combination was $7. 5 billion as it phased out monetary notes at home. Yields outside Korea, the Philippines and Thailand rose across the curve, with higher inflation from subsidy cuts a driver in Indonesia and Malaysia. Credit spreads between junk and AAA corporates were roughly unchanged in the three biggest markets, and Malaysia’s central bank finalized comprehensive Islamic finance guidelines to support no-interest versions.

According to the ADB it has 85 percent of East Asia $185 billion sukuk market and firms in Hong Kong, Singapore and Indonesia regularly float ringgit paper. Jakarta is active in USD but the Singapore and Brunei dollar share together is just over 1 percent. Corporate and government sharia-compliant structures are roughly even at $97 billion and $90 billion respectively, with Singapore’s entire issuance the former. As of June, Malaysia’s sukuk portion of the local currency total was 54 percent, and over 40 percent is the murabahah commodity sale mark-up type. The benchmark Government Investment Issues have maturities out to 20 years. Housing-specific bonds are the next most popular and banks buy half the total, followed by state pension funds and insurers. The highway agency is the top corporate participant and the Khazanah sovereign wealth fund is also an active sponsor for infrastructure and social projects. Indonesia’s $20 billion activity is far behind with only a 5-year track record and the government is the main source at home and abroad and prefers the agency and leasing-based ijarah and wakalah techniques. Islamic banks Muamalat and BNI Syariah feature, and volume swamps Brunei’s $500 million short-term from the monetary authority. The review points out that trading is still at a premium to standard fixed-income as measured by a dedicated Barclays index, but correlations in Indonesia and Malaysia have intensified with overlapping troubles.

India’s Mutated Mutual Suspicion
2015 September 29 by admin

Posted in: Asia
Indian stocks continued to languish after August’s $2 billion in net foreign investor outflows, as Finance Minister Jaitley prodded the central bank to lower rates in the continued debate over independence and the Mumbai exchange’s long-awaited demutualization step through a $1 billion IPO was on hold despite the securities commission’s promise to act. International equity and bond allocation remains positive for the year in contrast to China and the rest of Asia, and the rupee’s drop against the dollar at around 10 percent has been a fraction of other major emerging markets. Minister Jaitley asserted that he and Governor Rajan were in accord over new monetary policy board membership where the government could not swing the vote and that 3. 5 percent range CPI was “under control” with near-term commodity prices likely to be subdued. Regardless of monsoon trends food supplies have been warehoused while keeping the fiscal deficit under 4 percent of GDP, he claimed. Growth is on track for 7-7. 5 percent and the current account deficit should be negligible as FDI has jumped 50 percent due in part to industry openings from coal to insurance, the Minister pointed out in defending the early Modi record. He signaled a further push for a national goods and services tax and cited insolvency law overhaul as key for bank cleanup and confidence. In the World Bank’s Doing Business ranking resolution takes double the time of BRICS peers and recovery value is only 25 cents to the dollar. Recent big plant announcements came from Taiwan electronics assembler Foxconn and US automaker Ford, but domestic investors remain skittish with rule delays and outstanding debt. Big family groups are trying to restructure obligations in the real estate, energy and infrastructure sectors to state-owned lenders in line for $10 billion in recapitalization over the coming years. The financial system agenda has been partially diverted by a poor and rural” inclusion “campaign to open hundreds of thousands of new accounts. Micro-lenders have been upgraded to offer services to this customer base under a special licensing regime, and eight out of seventy applicants were initially chosen.

The government did not concede defeat on the land acquisition bill, as it argued that ruling BJP party leadership in many states could align better policies. Services continue to represent almost 60 percent of GDP, and e-commerce has set off fierce rivalries between well-known names like Flipkart and Snapdeal. The Prime Minister’s “Made in India” manufacturing drive has been off to a slow start but phased corporate tax reduction from 30 to 25 percent has been well-received. Tax-free infrastructure bonds could lure overseas buyers pinched by the quota for normal government paper and lack of private alternatives. Foreign exchange reserves are at a record $350 billion and the Commerce Ministry has adopted a plan to double exports by end-decade. The US is the leading destination and pharmaceuticals could be an indirect beneficiary if the Trans-Pacific Partnership free trade negotiations are completed and voted on soon in member legislatures. With half of the 1 billion population under age 25 smart phone demand continues to jump 30 percent annually, even if top official communications are often contradictory.

Greece’s Repeat Sisyphean Tasks
2015 September 29 by admin

Posted in: Europe
Greek shares remained at the bottom of Emerging Europe, with the debt yield curve inverted with 10 percent short-term rates, as Prime Minister Tsipras won re-election with his Syriza party and its main ally controlling the same bare parliamentary majority. The result was a surprise to the extent that the conservative New Democrats who were in charge before January surged late in opinion surveys seeming to put them in striking distance, but the actual victory margin was again decisive. The far-right Golden Dawn bolstered support on islands absorbing Middle East refugees with its anti-immigration stance. The once-dominant center-left Pasok was relegated to a handful of seats, and Syriza’s breakaway wing did not manage to change the political equation as it girds for immediate fights on EU bailout plan implementation. The Finance Minister who succeeded the fiery academic Varoufakis will stay on, as the latter sustained controversy during the campaign with comments that “a 10-year old with math skills” would recognize austerity cannot overcome unsustainable debt. S&P reaffirmed the CCC+ stable rating with the outcome as it reduced Grexit odds to 33 percent. Eurogroup chief Dijsslebloem insisted the EUR 80 billion package will not be renegotiated as the Stability Mechanism admitted to a privately placed bridge loan in July to finance the poll period.

GDP growth was positive in Q2 at almost 1 percent, although industrial output and retail sales were down and deflation persisted. Tourism arrivals increased 20 percent on an annual basis, but trade and fixed investment continue to slump and consumption improved as a blip in advance of capital controls. Privatization will again miss the EUR 1. 5 billion target, and the property market is among the five worst in the world according to industry experts with official unemployment stuck at 25 percent. Bank credit ratings were slashed to “C” with non-performing loans at 40 percent by the latest tally as European supervisors conduct their own asset review around the estimated EUR 25 billion recapitalization program. Emergency liquidity assistance was EUR 90 billion as of the election call and deposit outflows were EUR 300 million in August. Senior bondholders could face haircuts under new rules but the exact classification and loss formula may not be determined for months as examiners sort out the books and consult with the new pan-EU regulatory authority. Complicating the assessment is the lingering Agricultural Bank scandal, with thousands of alleged illegal loans over a decade and over EUR 5 billion never recovered. A central “bad bank” as in Spain is still under consideration, as the four remaining groups also seek relief through eventual government bond-buying under the ECB’s quantitative easing if small amounts are eligible.

The IMF has yet to sign up for Greece’s latest arrangement while endorsing Cyprus’ progress with release of another installment despite the sticky 50 percent-plus NPL ratio. Portuguese share direction awaits the result of the upcoming close contest between the ruling coalition and opposition Socialists, with anti-austerity parties possibly uniting with the latter to put them over the top. Economic growth is 1. 5 percent on 12 percent unemployment, and consumer credit continues to lift household spending even as the Novo Banco sale to Chinese bidders became uncorked.

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President Xi’s Summit Non-Performance Spotlight
2015 September 23 by admin

Posted in: Asia
Chinese President Xi’s visit to Washington beginning September 24 has been on the calendar since US President Obama’s invitation last year, and may have passed with limited fanfare before the extraordinary currency and stock-market events the past two months coinciding with an economic growth and debt squeeze. For China and general emerging market observers the June Strategic and Economic Dialogue went largely unnoticed outside cybercrime issue escalation and bilateral investment agreement consideration. Exchange rate undervaluation had been removed as a sticking point by US Treasury Department and IMF pronouncements that market forces were in play, and controversy over the new Asia International Infrastructure Bank, which Washington chose not to join, was partially defused by Beijing’s commitment to cooperate with the Bretton Woods institutions. The script for a cordial quiet exchange of views has since been tossed not only with the threat of sanctions a for alleged computer network hacking, but with unprecedented post-2008 crisis doubts over banking and securities market health and GDP growth and renimbi direction President Xi and his team must urgently clarify.

The leadership has already tried to preempt devaluation worry and reiterate reform commitment with official assurances. Premier Li in a speech said no further Yuan weakening was imminent, and at their recent retreat top economic policy-makers detailed their agenda for “mixed ownership” in the massive state enterprise sector. However in the offshore market the currency has continued to decline toward 7/dollar, and Beijing has reportedly tried to intervene there to reverse the trend. Additional formal depreciation before the Washington summit and through October’s IMF annual meeting in Peru would upset these events, especially as inclusion in the Fund’s SDR basket remains on the table. However global investor surveys now regularly cite Chinese currency risk in light of the record $600 billion in capital outflows the past year depleting international reserves to $3. 5 trillion. Recession, defined as growth in the 5 percent plus range, is another worry reflected in the latest industrial and consumer figures, and the announced moves to introduce minority private ownership and fresh management at big government firms fall short of the competitive push needed to restore course.
Banking and shadow banking have been the subject of bland communiqués in the past but headline troubles raise their importance at the upcoming Xi-Obama sessions, just as the 2008 subprime debacle was addressed then in public bilateral channels. The four giant state commercial banks continue to report earnings drops and non-performing loan increases, particularly in the real estate and local government sectors. The bad credit ratio is just over 1 percent according to local accounting standards, but international estimates believe the damage could be halfway between there and the rate experienced after the 1990s regional financial crisis at 15-20 percent. Smaller private banks, without sovereign backing, began experiencing liquidity difficulties last year when a crackdown began on high-yield informal trusts and wealth management products they promoted. These structures have since been adapted in other forms with the potential to wreak havoc, and underground and new online lenders previously escaping the net have started to come under regulatory scrutiny and appeal to the government for rescue.

With the authorities’ hundreds of billions of dollars in intervention and trading suspension in hundreds of listed companies, the Shanghai stock exchange is no longer accessible as a normal emerging market. US retail and institutional investors have dumped their holdings but large sums remain trapped. Hedge funds like Chicago’s Citadel are under investigation for short-selling during the immediate crash. That practice has been banned during the 30 percent correction since June, which commenced just as index provider MSCI decided not to increase China’s core universe 25 percent weighting. With its actions and the absence of a timetable for lifting interference, both the mainland and Hong Kong will face calls for reductions and even suspensions from the benchmark gauge. President Xi may not have originally contemplated the test, but he will be measured in Washington for the first time globally by a strict and widely-followed financial system stability yardstick.

Originally published by Asia Times Online

Europe’s Missing Financial Instrument: Refugee Bonds
2015 September 23 by admin

Posted in: Europe
The Middle East and African refugee crisis overwhelming Europe has revealed an East-West split toward acceptance reflecting cultural as well as budget differences. Emerging market frontline states in Central Europe and the Balkans are unaccustomed to hosting large foreign populations and are poorer than their Western neighbors and can seek EU aid for their own humanitarian needs. They run chronic budget deficits but to bridge them sovereign local and external bond issuance has become routine. Governments in central and Eastern Europe may also be able to raise billions of euros through bonds for the Syrian, Iraqi and Northern and Sub-Saharan Africa influx. Global fund managers have maintained positive net emerging market debt allocations this year where the proceeds go for infrastructure and social spending, and dedicated refugee issues would be a natural extension. “Refugee bonds” could provide both commercial and “solidarity” returns to strengthen the European project, and redress the UN’s traditional donation gap after relying on government and private sector appeals.

Before the Syrian exodus reached the continent immediate neighbors Turkey, Jordan and Lebanon had absorbed millions and struggled to relieve the financial strain. Turkey’s military operations against Islamic State have added to the conflict’s cost; the government claims to have spent $ 7. 6 billion for more than two million refugees. Exports to Syria slid to $750 million in the first half after 2014’s $1. 8 billion full year total. It has largely absorbed the burden out of its own resources, as stock and bond outflows recently hit $5 billion with the announcement of new elections portending further political gridlock. The investment-grade sovereign rating is under review and the equity market, down 35 percent, is the worst performer in the MSCI core universe behind Greece. Local bond yields are above 10 percent on creeping double digit inflation, and the economic growth forecast was just slashed to less than 3 percent. Remittances from the wider Syrian and Iraqi diaspora will help, but the current account deficit remains 5 percent of GDP and the primary budget surplus is under pressure with refugee outlays.

Jordan has depended on a $2 billion IMF program and $5 billion in Gulf Cooperation Council assistance and the US has guaranteed a $1 billion sovereign bond. The last border crossing to Syria was recently closed and tourism has never recovered from the war spillover and earlier Arab Spring uprising. The small country has hosted a refugee Palestinian population for decades in camps administered by a special UN agency and called for a similar international effort for the fresh arrivals. Lebanon has long been mired in intrigues and violence next door and already has among the world’s highest debt loads at 140 percent of GDP. Despite a sovereign downgrade and meager 2 percent growth, a $2 billion external bond placement was successful with a stalwart buyer base of local banks and wealthy individuals abroad. For over year infighting between Hezbollah and other political parties has blocked government formation and trash collection, as refugees are barred from employment with the impasse. Iraq with its huge internally displaced population has announced a $6 billion bond plan to tackle the problem and gaping budget deficit, and speculative investors may be tempted by 10 percent-plus yields.

Greece across the sea from Turkey was the first Emerging Europe destination to feel the subsequent onslaught, and it has since moved to Hungary, Serbia and elsewhere as a gateway to desired resettlement in Germany and other richer EU members. Hungary’s Prime Minister Orban may be trying to outflank the opposition far-right Jobbik party with xenophobic rhetoric and fence construction, but he has also worked to assuage foreign investors holding one-third of local debt so he can pay for the limited reception under his tough line. Before the crisis the budget was on track to meet Brussels’ 3 percent of GDP deficit threshold, and successful bank Swiss franc mortgage conversion had softened the threat of additional punitive taxes. The stock market through end-August was the top MSCI Index gainer at 25 percent, and deflation was rolled back that could have raised the cost of public debt at 80 percent of GDP.

In Serbia in contrast the stock market has dropped over 20 percent on the MSCI Frontier Index and foreign investors remain wary of local and external debt, despite progress on reducing fiscal and current account imbalances under a resumed IMF facility. The benchmark 5 percent interest rate is Southeast Europe’s steepest as inflation increases with electricity price hikes. State enterprise divestiture promised for years is proceeding slowly, with many banks and “strategic” firms still off limits. Croatia has also received diverted refugee waves and may turn to the IMF soon with its own high-debt state-dominated economic drag. Leaders in both countries have clearly stated that with cash crunches they cannot handle the flow and asked the UN and EU for contingency funds.

Bilateral and multilateral guarantees could enhance refugee bonds from credit-strapped sovereigns, but Hungary, Turkey and others could issue them cleanly as a logical adaptation of existing instruments combining commercial return with public policy objectives. Such a targeted instrument, to be credible and reasonable cost, will need an independent tracking mechanism for the proceeds use, from basic essential services to possible job training, and that feature can draw on the UN refugee agency’s on-the-ground presence. As Europe currently scrambles to respond it can convene a global working group comprised of government and international organization representatives, investors and underwriters to design pilot issues for the continent and beyond. Emerging economies will no longer feel under such siege if they can mobilize distinct versions of their own financial market tools to meet the historic challenge.

Originally Published on bne IntelliNews 22 September 2015

Brazil’s Uphill Downgrade Damage Control
2015 September 17 by admin

Posted in: Latin America/Caribbean
Brazilian stocks and bonds remained in the performance cellar as S&P beat other ratings agencies to a sovereign junk assignment with a negative outlook as fiscal impasse added to a long list of economic policy and governance misery. In the days preceding the downgrade, Finance Minister Levy’s resignation was rumored as congressional opposition defeated spending and tax proposals to restore a primary budget surplus. The real hurtled toward the 4/dollar previous low during the early 2000s crisis, as big bank and corporate demotions including for Petrobras and BNDES were next in line. With $45 billion of dollar bonds outstanding, the former could become the largest US “fallen angel” after General Motors and may not feature in standard high-yield indices to force more selling. Brazil’s CEMBI spread at 700 basis points was the widest since 2009 as General Shopping signaled a likely restructuring. The Car Wash scandal claimed political allies of President Rousseff and her predecessor Lula’s chief of staff, amid talk that he could be directly implicated in the parallel Odebrecht construction contract bribery investigation where the CEO is already under arrest. In the US shareholder class action lawsuits are proceeding as the Foreign Corrupt Practices Act may invite Justice Department prosecution for money allegedly exchanged in hotel rooms. In Brasilia impeachment proceedings have not been ruled out, with the only precedent President Collor de Mello’s ousting over two decades ago for illegal home repair payments. He is caught up again in the current kickback suspicions, but so far President Rousseff has not been tied personally.

GDP shank 2 percent in Q2 and the recession is projected to last through next year, inflation is near double digits, and unemployment worsened to 7. 5 percent. The central bank benchmark rate is already punishing at over 14 percent as the 3-month loan default ratio approached 5 percent. Banks have also been spooked by likely re-imposition of a financial transactions levy as state retail giant Caixa postponed an IPO for its insurance unit. The current account deficit is stuck at 4. 5 percent of GDP, with FDI sputtering the past year, and a federal rescue may be needed for local governments like Rio Grande do Sul in default. Mass protests continue reflecting the President’s under 10 percent approval rating, and the gridlock has extended to central bank position appointments as a new economic policy chief is in limbo. Foreign banks like HSBC have exited, and local investment houses are increasingly scouting prospects outside in the sub-region, which may only be marginally better positioned.

Lapsed Mercosur partner Argentina has attracted attention heading into the October presidential election, with the August primary indicating a second-round Scioli-Macri run-off with the former the incumbent’s chosen successor and still the favorite. He has been boosted by pre-poll spending returning positive growth while widening the fiscal deficit. Privately-tallied inflation is over 25 percent and the parallel market peso premium is 60 percent, as formal devaluation will await the transition with $33 billion in reported international reserves. The trade surplus is down on flagging farm exports, and the holdout drama will extend into the next administration with split New York court rulings for the funds on possible access to local dollar-bond payments, and for the government denying the central bank is a sovereign alter ego in the long masquerade.

The BIS’ Private Debt Buildup Letdown
2015 September 17 by admin

Posted in: General Emerging Markets
The BIS repeated alarms over the accumulation of EM private and household debt since the 2008 crisis, as major investment houses noted that its banking and bond data base only comprehensively covered half a dozen countries and tried to construct their own broad estimates. JP Morgan described the surge as an “elephant in the room” with corporate bonds outstanding tripling from $1 trillion then and shadow banking bursting onto the scene in China and elsewhere. Credit/GDP rose 50 percent to 125 percent over the period and annual credit growth averaged 15 percent. Bank loans were near 100 percent of the figure, and businesses accounted for three-quarters of borrowing with Asia as the greatest regional concentration. Foreign currency activity is only one-tenth the $30 trillion private non-financial total, but governments may not be able to handle supply shocks despite decent balance sheets as they already grapple with dollar strength and capital outflows. BIS statistics are complete for developed markets but lacking in developing ones except for China, Russia, Korea, Mexico, Hungary and Poland. They track cross-border lines on a residence as opposed to nationality basis, missing large movements through offshore centers. Even without China overall debt/GDP reached 90 percent at the end of last year, and although quasi-sovereigns with at least official implicit support constitute half of external bonds their domestic share is unknown.

For 17 of 23 countries in the JP Morgan universe the measure jumped at least 15 percent from 2007. Brazil, China and Russia have raised the most through offshore subsidiaries and Hong Kong and Singapore as Asian financial centers led the pack with 35 percent increases. In the region Korea, Malaysia and Thailand spiked and 18 percent-plus gains were registered in Turkey, Chile and Poland. Declines or small expansions in contrast were the pattern in Hungary, South Africa, Argentina and India. Bank credit for the two dozen members was $25 trillion versus $3 trillion in securities as the former leapt over 25 percent the past eight years. The corporate change has been double the household one at 12 percent, with the latter outside Asia prominent just in Poland and Turkey. Financial bonds in circulation at $4. 5 trillion are one and a half times non-financial ones, indicating still heavy non-deposit reliance. Including banks in external liabilities boosts the number to 20 percent of GDP on average with every country except Argentina over 10 percent in the full roster.

Exchange rate de-pegging which could aggravate loads is now under the microscope after moves in China, Vietnam and Kazakhstan but big adjustments may have preceded Beijing’s initial 2 percent tweak as commodity exporters remain under pressure. Gulf dollar regimes should stay intact although local borrowing will pick up to avoid reserve depletion in currency defense. In Central Asia oil power Azerbaijan already devalued by one-third in February, and still runs a current account surplus with an ample sovereign wealth fund backstop. Egypt may lower the pound toward 8/dollar in its next move to reflect parallel market weakness and accommodate volatility heading into long-promised parliamentary elections. Morocco and Tunisia may follow suit with managed pegs against the dollar and euro with the continued buildup in security and political transition tensions.

Ukraine’s Reshaped Restructure Deal Buzz
2015 September 8 by admin

Posted in: Europe
Ukraine shares recovered slightly from a 15 percent MSCI frontier loss and external bonds rallied to 70 cents as the Franklin-Templeton led private creditors group split the difference after acrimonious proposal exchanges and agreed on a 20 percent principal reduction and 4-year repayment delay. The breakthrough came after Finance Minister Jaresko and fund manager Hasenstab met for breakfast, and the IMF went ahead with another program installment and indicated continued support in the event of commercial default. A July coupon was honored but the parliament passed a moratorium law that would allow for formal non-payment if negotiations remained at an impasse. The $18 billion in obligations will be swapped into nine new instruments yielding 7. 75 percent starting in 2019, with GDP warrants phased in should output exceed $125 billion. The same terms are expected for city of Kiev Eurobonds and other outstanding international loans, and the committee’s control of 75 percent of most issues should ensure acceptance. The distressed deal will trigger CDS payouts and the Fund forecasts a 70 percent debt/GDP ratio at end-decade with the relief and post-war economic rebound. However output fell 15 percent in Q2 with no end in sight to the Russian border fighting, and Moscow will not join the framework with its $3 billion bond in the throes of Yakunovych rule as it may be classified as senior status official debt in near-term formulations. A nominal cease-fire is still in place in the East, but Kiev refuses power decentralization in the absence of an election process there which would be difficult to conduct both logistically and financially with the widespread devastation and displacement. Thousands have fled the area to join the refugee march to neighboring countries and express no desire to return even with a durable peace until President Putin also leaves the scene.

Russian shares also slid into the negative column as the 2015 official GDP contraction was revised to 3 percent with the oil price slump and devaluation in China, the largest trading partner. Double-digit inflation may linger as the ruble resumed depreciation toward 70/dollar, and the central bank demurred on renewed intervention and benchmark rate changes. Sberbank under sanctions reported an NPL rise to 5 percent and lower profits as Probusinessbank, a top 50 institution, lost its license as other second-tier lenders embark on consolidation at regulators’ urge. Pension funds in turn have been exhorted to buy local currency corporate and government bonds and a state emergency fund separately aids with immediate rollover needs at home and abroad. Counter-sanctions have deepened with the destruction of Western food imports and removal of “unsanitary” consumer goods from store shelves. The President’s railway chief was reassigned and his spokesman was criticized for luxury dress as a Kremlin cutback campaign began to secure high popular approval.

Turkey’s share plunge was over 30 percent on leadership rejection in contrast as fresh November elections were called after two months of coalition efforts failed. The lira neared 3/dollar and the central bank provided foreign exchange relief on persistent capital and current account troubles. Fiscal balance could be endangered with campaign and military spending for anti-Islamic state and Kurdish rebel operations, and bank non-performing loans were up 25 percent in the latest period on hairy repayment and political prospects.

Venezuela’s Overripe Revolution Crossing
2015 September 8 by admin

Posted in: Latin America/Caribbean
Venezuelan President Maduro, after seizing more multinational company food warehouses and banning jailed opposition leaders from end-year parliamentary elections, ordered the closure of border trading with Colombia and the expulsion of immigrants as he branded the neighbors as “criminals and smugglers. ” The crackdown came as CDS spreads rocketed to 6000 basis points on $40/barrel oil and $1100/ounce gold dwindling reserves to $15 billion in August, around half this year’s external financing gap. Sovereign and state oil debt repayments are $6. 5 billion for the rest of 2015 and $11 billion next year, and the EMBI component has been the worst performer with a 20 percent loss as benchmark yields top 25 percent. The government has sold a US refinery and raised cash from Caribbean neighbors with early concessional aid redemption, but ruled out large state enterprise unwinding which could bring $50-$75 billion. PDVSA’s 2016 bond still trades above 80 cents implying low near-term default risk, but hyper-inflation and devaluation may spark immediate crisis. Official price data is not regularly published but triple-digit increases are reported in social media and the informal market exchange rate, previously based on Colombian border sources, is in the 650 range to the dollar as the acute shortages persist under the new commercial auction mechanism between banks and brokers.

On social issues the President has only built half of promised working class housing and the murder rate is now the highest in the region, as another foreign couple was killed in a headline robbery outside Caracas. After selective sanctions were imposed by Washington for anti-democratic behavior he began blaming outsiders for economic collapse and extended the strategy to Bogota in a strategy foreshadowed by his predecessor Chavez, who supported the rebel FARC and applied his own import ban during a diplomatic feud. According to opinion surveys, opposition parties are ahead for the December polls and even allies Bolivia and Ecuador acknowledge that outcome may be recognized as the tripartite South American Community strives to maintain viability as a rival hemispheric bloc. Ecuador’s President Correa faces natural disasters from volcanic eruption and El Nino at the same time China’s woes have drained the loan spigot. Demonstrators in Guayaquil jeered tax proposals to fund public spending equal to almost half of GDP. Foreign reserves are just $4. 5 billion and external bonds are now prohibitive at a cost over 10 percent, so a framework has been introduced for alternative electronic money to ease the dollar regime. He has accused labor, business, indigenous and journalist groups of coup plotting and may try again to change the constitution to permit unlimited terms.

Colombian stocks were down 45 percent on the MSCI Index at Latin America’s bottom with the Caracas confrontation added to commodity export and peace process woes. Pacific Rubiales also listed in Canada has run into debt repayment trouble with the peso off 35 percent against the dollar the past year. The current account deficit is 6 percent of GDP, and the central bank has been on hold on projected 3 percent growth mainly from domestic demand including a $50 billion multi-year infrastructure program. After three years of negotiation a guerilla attack killing a dozen soldiers may have indefinitely scuttled resolution of outstanding “war crimes” issues, as President Santos’ 30 percent public approval also defies reconciliation.

South Africa’s Unreserved Rescue Criticism
2015 September 1 by admin

Posted in: Africa
South Africa’s Reserve Bank refused to step in as the rand tumbled to 14/dollar and the MSCI stock market gauge shed 15 percent, as governor Kganyago would only consider intervening to provide emergency liquidity in light of the aborted defense 15 years ago that wiped out holdings. Unlike other big developing economies he pointed out that only one-tenth of government debt was in hard currency and few corporates tapped external markets. The benchmark 25 basis point rate rise in July had not reversed downward pressure even before China’s devaluation and equity crash reverberated, and the terms of trade are set to turn more negative with commodity export punishment and keep the current account deficit at 4. 5 percent of GDP. Electricity price hikes hoisted inflation above target but should settle in the second half although daily shortages linger to slash mining output as industry wage talks again foundered. With gold in a slump most producers are not profitable and workers continue to press for better salaries and living conditions in light of past often violent confrontations with management. Multilateral lenders have been pulled into the conflict with families’ lawsuit against the World Bank’s IFC arm, with a small stake in miner Lonrho, for alleged negligence in allowing the Marikana shootings by police. Growth may be only 1-2 percent this year as officials try to meet the 3 percent of GDP budget deficit pledge to avoid sovereign rating downgrade. They have also suffered sharp public relations blows as former president Deklerk, the last under apartheid who shared the Nobel peace prize with Nelson Mandela, has lambasted political and economic stagnation in global media outlets and counterparts in next-door Zimbabwe without its own currency expressed doubts about future rand reliance.

Nigeria’s MSCI frontier measure was off 25 percent as the central bank chief there refused devaluation as the parallel rate crumbled toward 250/dollar despite stable international reserves at $30 billion for five months’ imports. Bank and foreign goods restrictions have been imposed to conserve dollars and phone giant MTN had to suspend bond repayment without access. Growth has fallen to 2. 5 percent with oil under $50/barrel, and federal government revenue decline persists in the absence of an Economy Minister and as states request bailouts to cover salaries and debt rollovers. A new national petroleum company boss was appointed with previous experience at Exxon but promised reorganization will take months as billions of dollars may be missing from the coffers and fuel subsidy adjustments have been ruled out for now by President Buhari. The behemoth may be split into separate operating and regulatory units and a comprehensive independent audit may again be undertaken after one was commissioned to look into “leakages” cited by former central bank honcho Sanusi.

African currencies and securities were not spared the Chinese conflagration: Ghana and Zambia external bond yields spiked to 10 percent, Kenya’s shilling dropped to 100/dollar, and stock markets were down 30 percent through August. Mauritius’ MSCI reading dipped 10 percent as it was buffeted as well by India’s reversal with its offshore hub relationship amid continued bilateral tax complaints.

Cuba’s Hoisted Flag Flaps
2015 September 1 by admin

Posted in: Latin America/Caribbean
Havana and Washington reopened their embassies in solemn ceremonies attended by veterans of the decades ago break in diplomatic relations, as US banking and telecom firms received permission to service the island. Under looser rules 80,000 Americans not of Cuban descent visited through July, helping to support estimated 4 percent GDP growth. Agricultural exporters continue to press for the removal of industry and broad trade sanctions to boost last year’s $300 million in exports, but have come to realize they must also extend credit as officials repay old debt to Mexico, Russia and Japan. Secondary trading of outstanding Cuban obligations has picked up but the market remains illiquid and is hobbled by the bar on US participation. As a proxy investors have bought the closed-end Herzfeld Caribbean Fund, where the equity portfolio has begun to target technology in light of the Castro government’s commitment to broadband in half of homes by end-decade. The next Communist party congress early in 2016 is expected to unveil additional small-scale private sector reforms and could introduce a formal timetable for currency unification. European and Latin American companies with existing ties have revealed modest expansion plans as they continue to contend with overweening state partnership demands and domestic political and economic swings. Spanish banks and firms enjoying a 3 percent GDP recovery doubt that any major or insurgent party will win convincingly in upcoming elections, as local currency earnings in the region are hammered by slumping commodities and domestic demand and capital outflows.

In nearby Central America in contrast bond sentiment soured with massive anti-corruption protests calling for executive branch purges in Guatemala and Honduras. The former holds presidential elections the first week of September after the bribery arrests of the Vice President, central bank head and social security system administrator following a UN panel investigation. The outgoing incumbent Perez Molina could not field a party successor under scandal and the front-runner has been tainted by the monetary authority’s alleged misbehavior. Before the poll growth and inflation were both 3 percent with mining and financial services up double-digits, as the fiscal deficit rose to around 2. 5 percent of GDP to be financed by domestic borrowing. Remittances were up almost 10 percent on US construction rebound, as lower oil import costs reduced the trade gap.

Honduran President Hernandez is a year into his term and the Supreme Court recently ruled that he could seek a consecutive mandate, as the National Party in power was implicated in a big health service fraud. He agreed to “dialogue” with demonstrators but refused to resign or convene an independent inquiry. The IMF program of budget restraint may now be complicated by the standoff as higher sales taxes push inflation to 5 percent. The building sector has weakened but remittances jumped 15 percent in the latest quarter to shrink the current account deficit to 6. 5 percent of output. The booming dollar has lifted consumer spending power at a time both countries may have to wait for a new Obama administration anti-poverty initiative to gain traction pending a truce between leaders and increasingly vocal civil action flag bearers.

Europe’s Disturbed Deleverage Design
2015 August 27 by admin

Posted in: Europe
Central Europe stock markets searched for direction despite a regional safe haven switch following China’s devaluation, as the Vienna Forum hailed early year bank deleveraging and capital outflow moderation in its periodic public-private sector monitor. The publication reported that the average loan-deposit ratio remained 110 percent but annual credit growth was down to single digits on both demand and supply changes. The IIF’s latest survey of bank lending conditions showed Q2 improvement but the index is still stuck under 50. Household borrowing has retrenched for hard and local currency mortgages alike and corporations are working off previous debt overhangs amid tepid economic recovery with Eurozone expansion at just over 1 percent this year. Hungary’s 20-percent gain as the exception began to flag in July with undecided voters now greater than support for the main political parties, with Prime Minister Orban’s ruling Fidesz pulling in 38 percent, 10 points ahead of the right-wing anti-immigrant Jobbik. The refugee influx from Africa and the Middle East through the Balkans has become a pressing issue with authorities planning to build a border wall. GDP growth has slowed to 2. 5 percent and the central bank has signaled the end of interest rate easing in 10-15 basis point increments with the 1 percent bound approaching. June inflation was 0. 5 percent as deflation may be decisively banished and the 3 percent target may be hit by year-end. The currency is around 310/euro and local bond yields have crept up as the 2. 5 percent of GDP budget deficit aim may prove elusive with recent bank tax modifications. The current account surplus has held at 5 percent of output and the Prime Minister may be hedging export bets by cultivating ties with Moscow despite EU sanctions, including renewed energy cooperation.

Poland has suffered as the liquid currency proxy for the area as the opposition Law and Justice Party extends its lead for October parliamentary elections. Voter intent to punish the long-dominant Civic Platform was reinforced by former prime minister Tusk’s facilitation of a third Greek EU rescue deal in contrast with the rapid shock therapy Warsaw endured in the 1990s, as the legislative challengers claim the nationalist mantle. Incumbents may try to regain popularity with a mandatory plan for Swiss franc mortgage conversion in contrast with the previous voluntary stance, but such steps are likely too late to reverse the fall poll outcome. Investors worry about overspending and further state takeover of private pensions, and a more confrontational foreign policy toward Brussels and NATO as Ukraine teeters next door. Romania has been up on the MSCI Frontier index as another outlier, but an anti-corruption crusade including the indictment of former prime ministers seems to have pre-empted tax reforms demanded by the IMF to resume a backstop program. The chief prosecutor, a former basketball star, has notched 1000 convictions redeeming the cleanup pledges of ethnic German President Iohannis. Although the Greek crisis has not infected local subsidiaries, private sector credit is flat with banks’ NPL ratio at 15 percent. The currency is steady at 4. 4/euro but previous over-weights have been purged as a skeptical crusade again gathers pace.

Iran’s Winding After Punishment Windfall
2015 August 27 by admin

Posted in: MENA
The main Tehran stock exchange index was up 5 percent in the latest quarter with a marginally stronger currency as international businesses and organizations began to probe post-sanctions asset and economic relief, despite the close anti-nuclear weapons treaty vote expected in the US Congress. The World Bank in a report predicted an immediate “windfall” equivalent to 3 percent of GDP with banking, insurance and trade and investment opening as over $15 billion in lost oil exports the past two years is recovered. It presumes an output return to one million barrels/day will lower global oil prices by ten dollar in 2016. Commerce will resume most with Asian and Middle Eastern partners as well as the UK and recession will definitively end as one-third of $100 billion in frozen accounts is released in the first phase. FDI could double to $3 billion from the current level chiefly in the hydrocarbons sector, as officials put end-decade needs at $150 billion to sustain capacity. India, China and Russia should lead the company pack but American and European multinationals could join and move into autos, manufacturing and pharmaceuticals as well, the Bank believes. The economy’s size is the same as in 2009 and unemployment is 15 percent, but inflation has halved to 15 percent. Medium-term growth should reach 5 percent and car production could recapture pre-sanctions strength. European drug sales at $2. 5 billion in 2012 could restart but the 1 million new jobs required annually to absorb demand are unlikely. Real exchange rate appreciation could hurt agriculture and industry and encourage services shift. Non-oil exports have been supported the past decade with government subsidies which can no longer be afforded for petrochemicals, plastics and feed in light of competing infrastructure, education and training imperatives. The Bank urges a break from the past pattern of sudden booms when consumption and showcase project spending were priorities, and governance and transparency transition to a well-managed sovereign wealth fund in contrast with recent practice.

The Energy Ministry is redrafting contracts to allow more royalty flexibility and for possible equity stakes in local companies, but Chinese and Indian state producers may be the first to expand relations, especially with Western counterparts’ difficulties in securing trade finance from banks under strict money-laundering and anti-terror rules where violations have brought multi-billion dollar fines. Standard Chartered still has a local license, but was recently hit with a $1 billion penalty and is struggling to rebuild its emerging market franchise and top management.