No More Learning

5 percent of GDP, reserves are triple short-term external debt and operations should only occur in “exceptional circumstances. ” Taiwan has a pegged exchange rate and its dollar jumped 7 percent versus the greenback in the first quarter. Foreign currency purchases in 2016 were $1 billion/month, and outside experts put undervaluation at 25 percent. It is not an IMF member so does not publish the same reserve data as all other big Asian emerging economies to potentially flag irregularities.

Egypt’s Chiseled Church Chastening
2017 April 22 by admin

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

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



Venezuela’s Chafing Charter Wrongs
2017 April 15 by admin

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

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

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

Africa’s Reshuffled Ratings Deck
2017 April 15 by admin

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

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

Africa Infrastructure’s Pensive Pensions
2017 April 9 by admin

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

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

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

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

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

Financial Cooperation’s Benefit Benediction
2017 April 3 by admin

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

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

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

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

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

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

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

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

Brazil’s Reconstructed Temptation Temerity
2017 March 25 by admin

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

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

Russia’s Crossed Wire Winnowing
2017 March 19 by admin

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

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

Kazakhstan’s Contrived Constitutional Corollary
2017 March 19 by admin

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

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



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

Posted in: Asia
Mongolian shares rose 4 percent into March according to Bloomberg’s top company index, after the IMF extended another multi-year bailout for $440 million which can unlock an immediate additional $3 billion from bilateral and multilateral partners. China, which receives 90% of mineral exports, will bolster a $2 billion currency swap as part of the package, coming just five years after expiration of 2009’s post-crisis program. With its 85% of GDP public debt, the country faced imminent default on an almost $600 million Development Bank external bond repayment due this month, as headline mining ventures unraveled over investor commercial disputes and alleged corruption and political favoritism. The new government in power led by the Mongolian People’s Party has promised to restore economic stability and creditworthiness through the Fund plan and more business-friendly policies, but protracted banking system and fiscal cleanups may exhaust multinational company and average citizen patience.

The Fund announcement described long-term agriculture and tourism diversification scope alongside natural resource wealth, but criticized “ineffective” spending designed to offset commodity price and foreign direct investment collapse. GDP growth “stagnated” at 1% in 2016, with high debt and low international reserves, which dipped to $1 billion or four months imports, in its wake. The currency lost one-quarter its value against the dollar, and a diplomatic spat with Beijing over hosting the Dalai Lama resulted in administrative and tariff penalties at year-end. The population went into the harsh winter with livestock under further claim as officials requested donations to help pay off overseas obligations. Nature was unusually unkind as disease ravaged rare antelope and drew appeals from global conservation groups.

In the mining sector, which accounts for one-quarter of output, the long impasse was ended in principle over royalties and management control at copper venture Oyu Tolgoi, operated by cross-border giant Rio Tinto. However the timetable for the project’s second phase has slipped, and private funding initially secured may have to be renegotiated with rising world interest rates. The fate of a $400 million sale of a Russian stake in state company Erdenet to a politically-connected Mongolian investor by the previous government is even more precarious. The parliament annulled the deal in February and called for renationalization amid charges the specialist Trade Development may have been an illegal hidden backer. President Elbegdorj complained the action would scare away foreign capital, but acknowledged the need to pursue investigations.

The financial system has been a shambles since independence starting with the central bank, which has been euphemistically engaged in “quasi-fiscal” activities including recent support for $800 million in cheap mortgage loans which had sustained household consumption. The Development Bank DBM, which provides one-quarter of total credit, carries an unconditional sovereign guarantee for its 2012 external bond as ratings agencies assign the issuers near-default status. The Bank’s former chief executive was arrested last year for abuse of the proceeds, and the latest Fund arrangement mandates a split between the government and lender, which is be run commercially according to a new law. A separate statute will overhaul the central bank’s governance and enforcement powers, and it is responsible for overseeing recapitalization and restructuring and shoring up the deposit insurance scheme after a comprehensive industry assessment.

Ordinary citizens have organized in anger against DBM, which they accuse of covering up losses and management failure at state coal producer Erdenes TT, whose non-voting shares were distributed to the public in 2010. The Mongolian Stock Exchange was considered a candidate to join MSCI’s frontier market roster early in the 2012-14 boom period, when cooperation pacts were forged with Hong Kong and London counterparts, but actual trading has stayed quiet in a handful of shares alongside hundreds of nominal listings and an absent local income market. With fiscal consolidation a “key priority” to reduce the 15% of GDP deficit, privatization offerings could inject momentum, but the record to date has been disappointing.

The IMF believes such overdue policy and reform steps can usher in 8% growth and $4 billion in reserves, comparable to the 2012 peak, by end-decade. It predicts mining diversification and solar and wind power has already drawn investors like Japan’s Softbank, and fashion, information and health service have started to appear. However Mongolia also owes $2 billion in external debt before that deadline and without bank and bondholder workouts at home and abroad, it may again fall into the pit.

The Opportunity in Refugee Finance (Financial Times)
2017 March 13 by admin

Posted in: General Emerging Markets
As the World Bank and other official lenders promote financial inclusion strategies in development programs, specific payment and borrowing needs around refugee communities, particularly in the Middle East and Africa, have started to come into focus. The newly-formed Tent Partnership for Refugees, hosted by yogurt maker Chobani as the successor to President Obama’s private sector call to action last year on the global migrant crisis, organized a working group, together with government and international organization partners, on banking and capital market access that met in January to consider policy input and pilot projects. Big names like Citigroup, Mastercard and Soros Fund Management are members of the panel, along with smaller specialist firms interested in micro-credit and crowdsourcing as well as traditional commercial bank and bond and stock market linkages. The group explored a range of promising business and technology fixes where tens of millions of dollars could be initially deployed, such as a vehicle to invest in major locally-listed financial institutions in exchange for their commitments to grow and adapt refugee finance solutions. This emphasis could help alter the savings and investment landscape for host migrant populations along with doubts about ailing mainstream banks struggling with difficult economic conditions, which have soured fund managers on major frontline state exposure.

Turkey’s sophisticated state-owned, private, and Islamic lenders have been caught in a political and economic morass since 2016’s failed coup attempt. The lira extended its losing streak into January as emerging markets’ worst performer, with the central bank refraining from raising headline interest rates in part for fear of further damaging bank portfolios, which have not yet incorporated the fallout from widespread forced and involuntary company closures. However even with a 10 percent MSCI equity decline last year many analysts continue to recommend Akbank and other sector stalwarts as good value with their franchises. They could potentially deepen footprints among millions of Syrian refugees in border camps and surrounding cities, and

diversify consumer and business outreach to offset existing deterioration. With the sovereign’s ratings downgrade to the BB speculative category, and delays and possible unraveling n the EU’s multi-billion euro aid plan, these intermediaries could also devise and underwrite new influx-specific infrastructure and education bonds if charged with the task and offered regulatory leeway.



Jordan and Lebanon likewise have world-class financial heavyweights on the stock exchange already engaged with refugee products and services and able to expand the delivery and innovation range. Starting with the “Jordan Compact” reached at a Syrian aid conference a year ago, international allies have stressed expanded free trade preferences in exchange for Amman’s relaxation of labor restrictions. The EU recently struck a garment import deal and supported further technical work and special tax-free zone local relocation for European multinationals, while the US Commerce Department led a trade mission there in December with financial services firm representation. Arab Bank could be a channel for greater banking and securities market development there and in neighboring countries, including the West Bank and Gaza, with a refugee presence. Lebanese counterparts in turn, have an historic reputation for functioning in a high-debt extreme conflict environment, and many have continued operating in Syria during the civil war while also serving the fleeing millions at home and abroad. They have created private placement sovereign bonds when external capital markets were relatively closed, and despite fresh access to the World Bank’s concessional borrowing facility, the government announced at last September’s UN Refugee Summit a pressing need for alternative long-term refugee funding sources that its banks could explore under a broad inclusion rationale.



Kenya has hosted one of the oldest and biggest camps for Somalis escaping their decades-long state destruction, and it is considered Africa’s digital payments pioneer with the M-Pesa network which has penetrated a full range of rural and marginalized communities. Almost all listed banks like Equity and Kenya Commercial have joined this revolution, and they were heavily switching from corporate to consumer business, including small traders as omnipresent in the refugee space, before a regulatory crackdown and the introduction of interest rate caps in a pre-election move by the President’s party. The government has threatened to close the camp but many security and economic analysts warn of chaos without a transition period and advise stepped-up financial sector coverage.



Asia would be an additional overlooked region where banks could be further tapped to tackle the

crisis response in their own interest. The Rohingya in Myanmar have escaped to Malaysia by boat, where Maybank and CIMB are among regional giants in both conventional and Islamic lines. A dedicated global refugee finance fund could be originated with Tent Foundation or other sponsorship, and would appeal to both standard emerging market and impact investors recognizing refugee waves as both business and development imperatives.

Islamic Finance’s Higher Calling Calibration
2017 March 5 by admin

Posted in: General Emerging Markets
The World Bank and Islamic Development Bank (IDB) issued their first joint Islamic finance report underscoring its potential contributions to reducing global income disparity and achieving sustainability goals, while advocating specific policy and banking and capital market changes for “shared prosperity. ” Mutual risk and asset-backed redistribution principles undergird the concept, with priority small business and infrastructure purposes. Industry assets are almost $2 trillion spread across 50 countries, as a dedicated Malaysia-based financial services board tries to promote best practice and common rules. The sukuk bond market has grown “considerably” the past decade, but equity is often hampered by “perverse” tax treatment, and corporate access has lagged sovereigns in the absence of a long-term yield curve. Non-bank institutions like takaful insurers are not as prominent, and adaptation for public social spending on education and housing has been slow. The IDB prepared a 10-year strategy and the G-20 presented recommendations for greater sharia-compliant application in government development plans, but major gaps remain, according to the study. Poverty rates in Islamic Conference countries in Asia and Africa exceed non-members, and financial inclusion indicators are also low with borrowing frequently confined to informal channels. No stock exchange yet operates in full observance, although index providers offer screens and performance data. Sukuk issuance peaked in 2012 and has leveled off recently, but Gulf external sovereign entry could boost the hybrid asset class, and investors may turn more to share alternatives as tax-deductability becomes more even. Accounting and auditing standards are increasingly similar through the technical work of a specialist body, but liquidity is still constrained by the lack of secondary trading, price discovery and rapid settlement. Islamic fund managers controlled $60 billion as of 2014 on annual double-digit expansion and have attracted socially-responsible mandates. For smaller firms crowd funding techniques could be adapted, and ijarah houses could increase leasing coverage. In religious and practical guidance a divide lingers between the leading national authorities in Malaysia and Saudi Arabia, and clarity is urgent on allowable participation in hedge funds and derivatives which should not automatically be considered “speculative. ” Malaysia’s regime dates back decades, and has the most comprehensive and sophisticated regulation and products, while Pakistan has a strategic plan that extends to Islamic micro-finance.

The Banks’ vision was unveiled as S&P Ratings warned of “continued hurdles” for Middle East banks this year with political and economic risks. They have ample retail deposits, but with thin fixed income markets government securities and direct lending dominate balance sheets. Debt-GDP ratios range from 80-135 percent in Egypt, Jordan and Lebanon, and Moroccan and Tunisian banks have less sovereign exposure but asset quality is in doubt. Foreign currency liabilities are a looming problem as longstanding exchange rate pegs are modified, and private sector creditworthiness is a “drag” with emphasis on “cyclical and vulnerable” tourism, real estate and commodities sectors. Construction and mortgages are 40 percent of the total for the region, but Egypt is “subdued” as an exception. Tunisia has low loan loss coverage generally as write-offs are rare, and residential property softness has spilled over to the commercial segment. Lebanon’s housing loans have surged under a central bank subsidy program, as Syrian refugees continue to seek shelter with scant conventional or Islamic finance recourse.

Iran’s Goaded Guardian Grimace
2017 March 5 by admin

Posted in: MENA
Iranian shares seesawed ahead of May presidential elections, with Rouhani seeking a second term, in the wake of venerated moderate Rafsajani’s death and a harder anti-nuclear and terror monitoring and sanctions approach by the Trump administration, which officially put Tehran “on notice” without detailing steps. In December the main US restrictions against prominent state banks and companies, particularly tied to the Revolutionary Guard, were extended another decade, and President Trump attempted to ban immigration from the country in an executive order on national security grounds initially overturned in court. The rising tensions coincided with a positive IMF Article IV report hailing “impressive” economic recovery since the joint agreement reviving global commercial and financial ties, although it cited “urgent” banking reform and stability needs. In the first half of the March 2016-17 fiscal year GDP growth was 7. 5 percent but the non-oil component was just 1 percent. Inflation dropped to 9 percent but money supply expanded almost 30 percent with central bank credit support. The current account surplus doubled as a portion of output to 6 percent with FDI in the hydrocarbon, auto and telecom sectors, and exchange rate depreciation continues with the official-market rate gap at 15 percent and unification again postponed. The benchmark lending rate was lowered 2 percent to 18 percent against a reported double-digit bank bad asset ratio, while the fiscal deficit persists at 3 percent of GDP on high subsidies. Capital adequacy was below 6 percent in 2015 and is negative at state intermediaries, with profits crimped by steep funding costs battering stock exchange financial listings. Previously unregulated credit providers are now under the central bank’s sway and pending legislation would update the decades-old enforcement and resolution framework.

Medium-term growth should settle at 4. 5 percent but unemployment currently approaching 15 percent will stay steep, the Fund believes. If poor relations with the US scuttle the nuclear pact, recession could resume, and the restoration of correspondent banking ties depends on incipient observance of FATF anti-terror and money laundering standards. The banking system is “fragile” with real estate and public enterprise exposure souring books. Bad loans take a decade to write off and must be fully provisioned, so they are rolled over indefinitely. Only private banks as a small category raise their own money competitively through deposits and interbank lines, and a new corporate insolvency code is required to aid restructuring. The central bank must slash directed credit and gain more autonomy with the elimination of government board seats and inflation-target adoption. The nascent domestic debt market can develop further after securitization of contract arrears, and financial sector initiatives could be underwritten by the sovereign Oil Stabilization Fund. For fiscal discipline cash transfers should be ended for the richest households, and structural reforms can boost the private sector with the low scores in a range of World Bank Doing Business measures. Female and youth joblessness are 20-30 percent and labor and regulatory distortions impede hiring. National accounts lack comprehensive and timely data for investors and multiple exchange curbs prevail beyond the two-tier rate subject to the Fund’s Article VIII approval to retain membership, as doubts linger over nuclear club aspirations.

Greece’s Explosive Expulsion Exclamation
2017 February 27 by admin

Posted in: Europe
Greek shares continued to slip as Euro-group Finance Ministers met to consider program status with fund release “unthinkable” ahead of a big July repayment according to its head, and the IMF still not on board against fierce criticism from top bilateral creditor Germany. EU Commissioner Moscovici reiterated support for its single currency membership, as the central bank governor warned of a repeat of 2015’s “vicious cycle” of previous suspension and an “explosive” debt burden toward aid’s 2030 end. The economy again tipped into recession in the last quarter, but 2-3 percent growth is projected this year with debt at 180 percent of GDP the Fund describes as “unsustainably high. ” The statistics do not capture the informal sector believed to account for one-quarter of output, with anecdotal evidence suggesting an increase as small firms enter to escape harsher tax collection. The 2016 half a percent budget primary surplus target was beat by almost 2 percent, but the 2014 commercial bond yield spiked to 15 percent ahead of July’s overall $7 billion due to external holders, including the European Stability Mechanism on the hook for two-thirds of the load after transferring EUR 175 billion. Prime Minister Tsipras vowed “not a euro more” in austerity as opinion polls show the reinvented conservative New Democrats ahead 10-15 percent in possible early elections. The IMF periodic staff review urged more “realistic” forecasts and goals, and additional debt and primary surplus relief, but German Finance Minister Schaueble led the rebuttal with insistence on the existing reform and stabilization strategy to stay in the Eurozone. Dutch counterpart Dijsselbloem joined the counter in questioning the “dated, too gloomy” report as these officials turned attention to potentially ore overwhelming core blowups in Italy and France.

In the former both resigned prime minister Renzi’s PD party and the 5 Star movement calling for a euro referendum have 30 percent voter backing before new elections, with banks responsible for one-third of the bloc’s bad credit. Growth is flat, and Monte de Paschi and Unicredit, with a once extensive Eastern Europe network, are struggling to raise private capital within guidelines set by the regional supervisory authority. French benchmark bond yields passed 1 percent and reached a 4-year high versus German peers as National Front standard-bearer Le Pen may be in striking distance of eventual presidential victory with the mushrooming scandal surrounding rightist candidate Fillon, who allegedly had his spouse on the official payroll without documented work. The Front’s trade and monetary plans have spooked investors, with recommended contract redenomination in the old local franc currency to assert “sovereignty” and import and immigrant bans as elements of “intelligent protectionism. ” Portugal and Spain remain on the periphery watch list with persistent banking and debt troubles as well. Portugal’s growth is just 1. 5 percent, and the OECD noted that investment is one-third lower than a decade ago with bad loans 15 percent of the total after a Chinese capital injection into system heavyweight BCP. Spain’s expansion was over 3 percent last year in a “cyclical recovery” in the IMF’s view helped by cheap oil imports. Unemployment lingers around 20 percent, and multinational bank BBVA earnings greatly rely on Mexico and Turkey in dizzying political and geopolitical cycles.

Nigeria’s Mangled Mystery Leave Latches
2017 February 27 by admin

Posted in: Africa
Nigerian shares tried to shake off the President’s unexplained trip for medical treatment in London and were largely flat through January after a 25 percent slide in 2016, as a $1 billion 15-year Eurobond return was well received at a near 8 percent yield. It will be used for infrastructure and deficit coverage in this year’s budget yet to be passed, and also help replenish foreign reserves which have jumped above $27 billion with an African Development Bank loan and higher oil prices. Growth has turned positive but inflation approaching 20 percent has not abated with continuous currency depreciation with the official and parallel rates around 300 and 500 per dollar respectively. The central bank vows to narrow the gap in the nominal floating regime while maintaining a web of import restrictions and deploying security forces to monitor dealers. Chronic shortages deter FDI, already hobbled in the petroleum industry with joint venture rule shifts and Niger delta rebel attacks, and resulted in the recent collapse of the main domestic airline unable to process payments and procure spare parts. Amid the furor, media speculation has intensified over President Buhari’s health, with lack of information about his absence possibly reprising a predecessor’s pattern of leaving the country with a vaguely-described heart condition before dying in office. While under care he reportedly held a phone call with President Trump representing the first outreach to an African counterpart, but neither Abuja nor the White House would confirm details.

South Africa was up 3 percent on the MSCI index amid its own leadership struggle as two candidates, ANC Deputy Ramaphosa and his former wife who was head of the African Union, declared to succeed President Zuma, whose second term ends next year. He conceded “mistakes” in a January speech to the ruling party, which could still oust him early over corruption charges. In the latest municipal elections the opposition gained control of Johannesburg and other cities, and his address in Soweto acknowledged shortfalls in education, employment and public services. The post-independence black economic empowerment scheme has also been widely criticized, with activists from the Malema wing calling for outright nationalization while the business community seeks a more commercially-viable formula for ensuring native ownership. Mining giant Anglo-American has recommended scrapping the 26 percent equity allocation mandate with controversy swirling over deals with politically-connected insiders. A new industry charter will be presented in March and the company threatens to go to court if the requirement is preserved, as its chief executive cited two-decade decline. GDP growth is forecast at just 1 percent this year with rising commodity prices, with the fiscal gap to stay at 3. 5 percent likely removing investment-grade sovereign ratings. The PMI manufacturing gauge rebounded above 50, but the consumer remains weak as reflected in falling personal income tax receipts. The central bank predicts higher food-driven inflation at 6 percent and a lower 3. 5 percent of GDP current account deficit, but has refrained from hiking interest rates with the rand settling between 13-14/dollar. It can expect additional demand from Zimbabwe, which plummeted almost 10 percent on the MSCI in January, as the authorities moved to reintroduce local currency to generate cash for the sick economy and increasingly absent President there.

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Egypt’s Frayed Fraternal Bonds
2017 February 20 by admin

Posted in: MENA
Egyptian stocks continued their comeback after 2016’s near 15 percent loss as a multi-tier $4 billion Eurobond, the first in two years, was three times oversubscribed from a diverse international investor base. The Finance Ministry conducting roadshows pressed fiscal and currency adjustment themes around the $12 billion IMF program, although public debt reduction may not materialize until end-decade according to its presentations. It was able to sell a 30-year piece at almost the same 8 percent yield as a coincident Argentina issue, ahead of planned $20-30 billion mega-placements by Saudi Arabia and Kuwait, where equities have also improved. Inflation blew out to almost 30 percent with de-pegging and tourism has yet to recover from security-related travel warnings despite the cheaper pound. The speculative sovereign credit rating has not budged, and President Al-Sisi continues to crack down on opposition as he tries to convince President Trump, after they struck a relationship during the campaign, to brand the Muslim Brotherhood a terrorist group cementing pariah status. The enthusiastic reception was in contrast with next-door Tunisia, also in an extended Fund arrangement, as it prepares a EUR 1 billion tap following a high-profile investment conference late last year featuring dozens of infrastructure projects. GDP growth should double to 2. 5 percent this year, but the chronic budget deficit is above 5 percent with the civil service wage bill out of proportion with regional and global peers. In the US the outgoing Obama administration pledged to sustain economic and military assistance which has focused respectively on enhanced border controls and small business creation. A venture capital enterprise fund was launched early in the Arab Spring and recent emphasis has been in areas like collateral reform to enable easier bank borrowing as state-owned lenders await another possible round of recapitalization. Privatization of the government’s large industrial portfolio has been promised under consecutive IMF programs with limited success, and stock exchange performance has been flat awaiting breakthroughs.

The Gulf has brought excitement with Saudi Arabia’s appointment of an independent boutique underwriting adviser for a slice of Aramco, as the market further opens to outside institutional investors with a stronger regulatory body. The domestic sovereign wealth fund, with $200 billion in assets, will get a windfall from the sale after the central bank just transferred $25 billion under a mandate to increase allocation for local employment and higher return categories. Another external bond operation is in the works, likely in the form of no-interest sukuk, as Riyadh has cancelled around $20 billion in contracts since the oil price and foreign reserve slides. Kuwait was up 15 percent in January on the MSCI frontier index, as its big weighting drew support ahead of inaugural bond and economic diversification initiatives. Bahrain and Oman dipped slightly as the former continues to experience Shia-Sunni clashes, and the latter had a 2016 fiscal gap at almost 20 percent of GDP and resorted to overseas borrowing and its sovereign wealth stash. Gas exploration spending jumped 10 percent for the Kazzan field and defense outlays also rose as the ruling family tries to cap a wellspring of political tensions from discontented youth and migrant workers.

Asia’s Stray Economic Strategy Strictures
2017 February 20 by admin

Posted in: Asia
A fifteen member Center for Strategic and International Studies panel headed by a former US Trade Representative issued a report to guide Asia-Pacific economic policy in the new administration after a year and a half of preparation and heavy emphasis on TPP ratification if the pact is redrawn. Infrastructure and technology are major pushes and it stresses China reciprocity and an updated architecture through the Asian Development Bank and APEC forum and dedicated staff at the White House National Security Council. The geography will account for 40 percent of global GDP by 2030, and already takes almost 30 percent of US exports for 3. 5 million. Asia’s direct investment total here is over $550 billion, with the Chinese deal pace tripling in 2016 from the previous year. The ASEAN bloc alone has 600 million customers and $2. 5 trillion in output as an unrealized prospect, despite “governance challenges,” the review stipulates. It laments Washington’s “distracted and inconsistent” approach the past 15 years resulting in botched diplomacy toward the Asian Infrastructure Bank’s launch as a recent example, which should have been embraced for its organizational and ownership contributions. TPP withdrawal may be “politically expedient” after the election result but rule-based order should be a linchpin of future agreement to be preserved as a goal. Services and energy are two sectors that could form specialized pacts. The former include health care, transport, information processing and finance. China and India will drive alternative fuel expansion and technology like wind and solar for decades, but the analysis points out that the era of double-digit growth is likely over across the region amid mounting debt and continued protectionism. Japan and South Korea have aging demographics, while low-income countries grapple with lagging corruption rule of law, and environment-natural resource indicators.

APEC, with Latin American participation, was founded almost 30 years ago and managed an information technology accord in 2015 but was largely overshadowed by TPP negotiations the past decade and is “amorphous” in the report’s view. The Trump team should stay engaged with the diversity of competing arrangements like the proposed ASEAN+6 free trade zone, as no single framework is likely to prevail. It should promote balanced and sustainable growth as recognized at the post-2008 crisis G-20 summit, greater American company access and entry, and trans-pacific commercial integration. Health pandemics and natural disasters can be tackled jointly by public and private sector representatives. The paper advises President Trump to articulate a vision in an early dedicated speech which can remedy TPP’s structural and political drawbacks with another market-opening campaign. Chinese intellectual property and cyber theft issues should be emphasized bilaterally in the Strategic and Economic Dialogue and informal channels at the top of White House coordination responsibility. Connectivity should be the main infrastructure thrust with US firm superiority, and private capital should be enlisted alongside official lending programs including Beijing’s One Belt-One Road. Congress and the Executive Branch should hire and train more Asia-focused staff and economists should be placed at the highest foreign policy making level, in contrast with the initial Administration preference for defense and public relations heavyweights potentially obscuring this background.

Haiti’s Searing Swearing In Swoon
2017 February 13 by admin

Posted in: Latin America/Caribbean
After a yearlong stretch of election delays and reruns, Haiti President Moise, an agricultural entrepreneur touted by his predecessor, took the oath of office in February to an audience of dignitaries from main donor countries. The IMF at the same time released a report on its $40 million rapid credit facility activated in the wake of Hurricane Matthew which showed flat growth and an inflation spike to 15 percent at the end of 2016 with continued double-digit currency depreciation. A joint World Bank-IDB task force estimated damage at $2 billion or one-quarter of GDP. Before that disaster drought and reduced external assistance through Venezuela’s Petrocaribe program had combined with extended political turmoil to deter foreign investment and increase dollarization. Reconstruction will widen the budget gap to 5 percent of GDP, and the central bank is to refrain from direct financing assuming bilateral and multilateral aid pledges are delivered. Garment sector exports, 90 percent of the total, remained intact and the diaspora raised remittances after the storm, but the current account deficit will exceed 10 percent of GDP. Growth may recover to 2 percent by fiscal year close with rebuilding activity, and foreign reserves may dip slightly but would still cover over four months imports. However the setback will elevate public debt to the high distress risk category, and the new government should aim to reprise economic management targets missed under the last full Fund arrangement, including on arrears accumulation and state electricity company overhaul. The central bank and finance ministry seem committed to tighter fiscal and monetary policies and have hiked bank reserve requirements to slash credit expansion to 5 percent, but internal capacity and safeguards remain weak, and future engagement will depend on stronger teams in place, the paper suggested.

Venezuela’s self-generated economic meltdown worsened last year with estimates of 20 percent output shrinkage and 800 percent inflation, as Vatican-mediated talks between the Maduro regime and political opposition reached an impasse over prisoner release and parliamentary power revival. Free trade bloc Mercosur, where Argentina-Brazil ties have warmed under new leadership, ousted the country for anti-democratic behavior and the Washington-based Organization of American States may also suspend membership. Families of jailed leaders have come to the US in a bid to influence the Trump Administration to harden the bilateral stance and decry the overall rule of law absence. The President declared 2017 as “new economic history” by naming a ruling party socialist deputy to head the central bank who has advocated exchange rate unification and other changes. However he will face continued control preferences among the President’s close advisors, so that adjustments are likely to be minor especially with the recent doubling of oil prices. Available reserves are around half annual $20 billion import needs and external debt service remains important after state fuel company PDVSA’s short-term maturities were extended and it lost foreign partners and may no longer have available cash for public social spending. Both direct and portfolio investment have dried up with even China cutting its losses after a reported $50 billion in credit for hydrocarbon deals the past decade may have been washed away in a default storm.



India’s Relentless Cash Squeeze Cascade
2017 February 13 by admin

Posted in: Asia
After a 2016 5 percent loss on the MSCI Index Indian shares were further saddled with GDP growth slipping below 7 percent, with the December PMI at a 3-year low under 50 due to the immediate demonetization effect of eliminating high-denomination banknotes representing 85 percent of currency in circulation. Auto sales as a consumption proxy were down double-digits, and according to small business surveys thousands of firms shut their doors or shed a large worker share. Housing transaction dropped 45 percent in the last quarter with a “complete standstill” described by industry experts, as Prime Minister Modi promised additional steps against “black money” ahead of a big March state election round which shows the opposition BJP likely to regain support in early opinion results. The Prime Minister’s image was dented by appearing to mimic the pose and dress of independence hero Gandhi in a public photo, and the supreme court head stepped down after months of mutual recriminations between the judiciary and ruling coalition lawmakers over respective powers, especially concerning boundaries between government and religion. Consumer inflation has been a bright spot and is under 5 percent with food price production, setting the stage for rate easing as banks are also flush with liquidity from rupee return allowing them to cut borrowing costs. However they are still contending with an estimated 15 percent bad loan ratio under stricter classification standards, which the new central bank head has signaled for possible review since the monetary reform he was not informed or consulted about in advance. Although an experienced technocrat he has come under criticism for official subservience to the sudden decision and failing to stress the lack of alternative electronic payment access for rural and poor savers. Conspiracy theorists have posited that his predecessor Rajan may have been removed as a potential impediment, and foreign investors who have been overweight local bonds are also upset quotas remain in place without the same drive to join JP Morgan’s GBI-EM index.

In Indonesia, where the MSCI gained 15 percent last year, that bank was suspended from primary dealing after negative research comments Finance Minister Indrawati called “irresponsible. ” She insisted that international investment houses adopt new conflict of interest and transparency practices against “instability” while insisting they were not censorship. JP Morgan later upgraded its recommendations as growth and fiscal policy stay largely on track, and foreign ownership of domestic government debt slid just slightly from one-third after the actions. However the Minister’s initial warm welcome may have evaporated after her credibility also suffered from overestimating the tax amnesty take. Korean shares, after a 5 percent jump in 2016, are under their own crisis microscope after presidential impeachment and chaebol executive arrests in an influence-peddling scandal which have widened valuation discounts to regional peers.