Tax obstacles have been removed to write-offs and prudential rules now
discourage
foreign-currency lending but another round of resolution efforts with proper provisioning and valuation is “critical.
Kleiman International
Remittances from the Gulf may hold up, but pledges of large aid and T-bill allocation by sovereign wealth arms have barely materialized.
Foreigners, who once accounted for one-fifth of the latter market, have cut holdings to a fraction as benchmark yields hover at 13 percent on headline inflation that has dropped to half that figure.
Public debt/GDP is already at 75 percent, and while fiscal policy remains loose the monetary authority has just raised interest rates while regularly intervening to keep annual pound depreciation to 5 percent.
The Fund previously proposed a $3 billion package with few strings, but with the deterioration since Mubarak’s January departure and the subsequent claims of the Euro-crisis a new offer may not meet the interim administration’s size and stringency desires.
In Tunisia the main Islamic party won handily in the initial political transition phase, and a counterpart was biggest vote-getter in Morocco’s monarchy-sanctioned exercise for a parliament with greater power. The Libya conflict will seal Tunisia’s recession as its rating is maintained on negative outlook and a large Eurobond comes due in 2013. At the opposite end of the troubled state output scale in the region Iraq on restored oil production is up 6 percent, but Baghdad has recently challenged Kurdistan over license awards to multinationals in a perennial politically-sensitive issue. From a security standpoint, the bulk of US troops are slated to leave soon but the stock exchange rally has sputtered on fears Iran incursions could join enduring inter-ethnic enmity as sand in the gears.
Private Equity’s Driven Deal Display
2011 December 1 by admin
Posted in: General Emerging Markets
The Emerging Markets Private Equity Association reported that Q3 fundraising through 120 sponsors had returned to the pre-Lehman level year to date at over $30 billion, a $10 billion jump over all of 2010. China-focused offerings took three-quarters of the total, while Brazilian ones took a record $4. 5 billion. 650 transactions over the period came to $20 billion, and the developing market fraction of the global total is 15 percent. With Europe’s crisis, capital mobilized has dropped under $1 billion there, with only $60 million put into Russia. Sub-Sahara Africa has drawn more at $1. 3 billion, quadruple the MENA region attracting $350 million, down one-third from last year. South Africa in turn has taken in just $100 million, one-quarter 2010’s commitment. Asia accounts for the most deal-making with 75 percent of the aggregate, although its activity is less than 10 percent the worldwide sum. China and India dominate, but PE investment as a share of GDP is 0. 15 percent and 0. 4 percent, respectively. India’s penetration is the highest among major economies, while Mexico’s and Turkey’s rank at the bottom. Turkish companies’ leverage has been a deterrent, with $60 billion in overseas loans due through the middle of 2012, according to the central bank. For the biggest emerging market corporates generally, record international bond payments of $55 billion are owed and recent exchange rate corrections could aggravate the burden.
In Central and Eastern Europe limited partnerships have begun scouting for openings with the likely pullback of Eurozone-based cross-border groups which comprise at least two-thirds of the system in Hungary, Poland, Bulgaria and elsewhere. Originally they had agreed as an extension of EBRD, EU and IMF support to keep their presence and portfolios essentially intact, but parents like Austria’s Erste now clearly intend to repudiate the pledge under earnings and Basel and European supervisor capital-raising goals. The fallout may extend to Spanish giants BBVA and Santander’s operations in Brazil, Chile, Mexico and Argentina. Last year a Brazilian unit IPO had been oversubscribed, but the stock market index and flotation pipeline have since cooled. Euro area bank claims there are almost one-quarter of domestic credit and household debt service levels merit comparisons with the US in the subprime heyday. Number one target China has also come under harsh banking criticism in its first IMF stability assessment as venture firms weigh economic, property, and local government risks. It questioned the oversight and performance of the state-owned commercial behemoths, and cited the system danger of multiple shocks that could include a sudden exchange rate shift which may again be in the startup phase with bilateral and WTO complaints.
Greek Banks’ Nihilistic Network Effects
2011 November 29 by admin
Posted in: Europe
Greek banks, that will suffer most as the largest group of commercial holders under a proposed 50 percent government debt haircut, reported deposit leakage of almost 15 percent this year as household lending was off 18 months consecutively. They have turned to the official guarantee scheme authorized under the original EU-IMF package to access ECB lines as branches in the main Athens protest areas have been abandoned and defaced. The big three groups in nearby Cyprus were again downgraded several notches by rating agencies on sovereign, retail and corporate exposure. Moody’s commented that with 40 percent of their portfolios at risk, state support could soon be needed despite its own chronic deficit with unchecked salary and pension outlays. Modest reform measures introduced after recent post-election leadership changes will leave a 2 percent of GDP gap, which may again have to be met through Russian bilateral loans as an extension of their longstanding offshore interests on the divided island. Before the banking crisis, authorities had to contend with tepid tourism and property sales off 20 percent, and a gas storage tank explosion that cut energy supply with heavy cleanup costs. Reunification talks with the Turkish side are also at a worsening impasse after the discovery of hydrocarbon deposits in disputed waters. Balkan neighbors Bulgaria and Romania have tried at the same time to offer reassurance about Greek-intensive financial institution health. In the former non-performing loans 3 months overdue are already at 15 percent, and the railway was just forced to shed thousands of workers to avoid bankruptcy relying on World Bank support. The Romanian central bank, with the comfort of a new IMF agreement, resorted to monetary easing on anemic GDP growth and urged further privatization efforts to free funds after a review cited “unsatisfactory” progress.
In Hungary, Greece references have resurfaced after that scenario was posed by Orban administration officials right after they took office with public debt at 75 percent of GDP. In 2012 foreign repayments will jump 50 percent to $6. 5 billion as the post-2008 IMF emergency loan comes due, and budget deficit and growth projections have both turned worse. Along with the fixed Swiss franc mortgage conversion program that may draw on reserves and require backing for state-owned top stock exchange listing OTP, municipal foreign-currency debt has also been assumed. The forint has dropped beyond the critical 300/euro level and local bond auctions have been lackluster and occasionally failed with premium demand and non-resident withdrawal from their previous one-third ownership stake. The government has wooed Chinese interest as an alternative, and invited their membership as primary dealers to meager results in a Sisyphean effort.
Cote D’Ivoire’s Default Remedy Dalliance
2011 November 29 by admin
Posted in: Africa
Cote d’Ivoire external bonds rose above 50 as the IMF resumed a $600 million credit facility with one-fifth the amount immediately available, even as the Finance Minister pushed the first repayment date on missed interest coupons since early this year to the middle of 2012. It also offered interim debt service relief as a new accord is negotiated with Paris Club bilateral creditors as part of a longstanding HIPC completion point push. Former President Gbago and his allies face trial although international human rights investigators found violations on both sides during the civil war. A reconciliation commission will convene after parliamentary elections in December as security forces try to reassert command over the north-south geographic and tribal divide. A more comprehensive restructuring on commercial debt principal has not been ruled out as economic indicators point to a 6 percent GDP decline this year on inflation around the same range, and state banks suffer from spiking NPLs. Their asset side, with large government securities concentration, was saved from further calamity when the West African central bank stepped in as a buyer, also supporting prices on the Abidjan-based regional bourse. Cocoa trade with big multinational buyers is again on stream after the brief boycott, and sector reform is a key structural aspect of the Fund accord, with President Ouattara’s advisers leaning toward a public-private mix which could inject efficiencies, while bringing in additional revenue for the chronic budget and current account gap. Anti-child labor activists have also demanded detailed monitoring and reporting of field practices, with US-listed companies facing possible supply chain verifications as with Congo’s minerals, where a conflict-free mandate was inserted in the Dodd-Frank law.
Another Sub-Sahara issuer joined the global sovereign ranks as Namibia came to market for $600 million, with neighboring South African institutions eager bidders. German vestiges there have inspired fiscal and monetary discipline, and the post-independence period saw an early example of peaceful transfer of power. Angola, with its own national liberation movement legacy, is often listed as a next candidate after getting the latest tranche of its $1 billion IMF loan conditioned on greater oil earnings transparency. Nigeria could come soon with a diaspora-targeted instrument championed by the Finance Minister when she was at the World Bank. Fitch boosted the outlook on the BB-minus rating to stable with the smooth election aftermath, and the central bank has hiked benchmark rates by several hundred basis points at a clip to defend the naira at 150-55 to the dollar and limit inflation to single-digits. A sovereign wealth fund with a professional board of directors with an initial $1 billion endowment is to replace the mishandled excess crude account which was often described as crude in its excesses.
China’s Delicate Dim Sum Dismay
2011 November 25 by admin
Posted in: Asia
The standout securities frenzy associated with trial yuan-denominated “dim sum” offerings in Hong Kong has joined wariness in other segments as credit risk specialists demand greater disclosure and standardization of Chinese company bonds, and daily currency volume to support the market is off one-third to $1 billion. Before the pullback less-known unrated names had tapped the channel as the currency continued to appreciate in its dollar band in part to blunt trade partner “war” attacks. Since September the 6. 3 rate has been relatively constant as authorities, responding to export slowdown, call the exchange rate “basically reasonable. ” The global spillover from the Eurozone crisis has caught investors and traders with illiquid positions for the new instruments, and the yuan portion of Hong Kong bank deposits at 10 percent has not changed since its rapid initial surge. The Cannes G-20 meeting reaffirmed a pause in Washington-Beijing confrontation after a Senate bill brandishing retaliation over alleged “manipulation” was stuck in the other chamber, and the Treasury Department again passed on reaching that conclusion with a delayed biannual report. The group communique mentioned the desire for flexibility, but dropped previous criticism of current account imbalances beyond a designated fraction of GDP. Among group members, China has entered over RMB 1 trillion in trade-related swap facilities, including with Korea, Russia and Argentina, and settlement can be extended to the capital account on outbound FDI which came to $70 billion in 2010. Access widening is planned as well through the respective institutional investor QFII and QDII schemes, with a particular stress on promoting internationalization to reduce dollar and euro official reserve reliance. The peril of such holdings was underscored by the recent approach from EFSF representatives for a large commitment to an expanded the rescue fund when Chinese portfolio managers are ambivalent about its current bond pipeline.
Weaker industrial output has tweaked the GDP growth forecast to the 8. 5 percent range, but the inflation fight with credit and property crackdowns and a raw material cost respite took it to 5. 5 percent. Despite pleas for monetary release, Premier Wen insisted real estate curbs would remain indefinitely as major developers head for serious squeezes and likely bankruptcies. An exception was made for credit-starved small businesses which have often turned to gouging informal lenders, and local governments have also been approved to issue bonds instead of depending on banks. Shanghai and Guangdong province have been chosen for pilot exercises with many foreign investors recalling the latter’s default through its trust company arm during the Asian financial crisis. Local banks also had to be recapitalized due to such debacles, and the leadership there and at the industry regulators has begun to rotate ahead of next year’s party congress arranging the complex political and economic platter.
Guatemala’s General Menacing Streak
2011 November 25 by admin
Posted in: Latin America/Caribbean
Former General Molina won the second round presidential runoff over business executive Baldizon, briefly boosting external bonds which must soon be rolled over as both candidates proclaimed centrist economic policies and a law and order stance against drug traffickers and kidnappers. The BB sovereign rating outlook had recently been downgraded to negative on security dangers and the persistent tax revenue to output gap threatening 3 percent medium term fiscal deficits. GDP growth and inflation are likewise running at 3 percent, as the central bank projects an almost 10 percent remittance rise to $4. 5 billion to counter a $1 billion higher trade shortfall. Commodity, tourism, and financial services earnings have held up despite the worsening violence condemned by the UN’s reconciliation monitors and other observers. Volcanic eruptions have also repeated the specter of natural disaster after heavy reconstruction costs from previous episodes.
Next-door El Salvador, which has a precautionary standby with the IMF, faces similar physical fears with the first lady traveling to Washington in November to seek support from the expatriate community and development agencies. With the dollar the official currency, household expense increases have caused 5 percent inflation on economic growth less than half that figure. Banking cleanup has progressed, but the structural reform pace will slacken ahead of next year’s congressional elections which may swing back to conservative party dominance under tough unemployment and poverty conditions. In Central America a contrast is often drawn with safer and wealthier Costa Rica where GDP expansion is double at 4 percent on buoyant hospitality and free-zone inflows. The current account deficit has swelled to 2 percent of output, but is offset by foreign investment in telecoms and hotel projects. President Chinchilla was educated in the US and garners attention as a female head of state on the area, but domestic debt continues to advance under her watch inviting rating agency caution.
In the broader geography, the Dominican Republic, as a member of the DR-CAFTA free trade pact, is cited as more attractive with its public debt at 30 percent of GDP and good marks on its 3-year $1. 5 billion IMF program. Visitor revenues are up 5 percent on an annual basis and FDI should jump one-fifth to $2 billion and should remain unaffected by upcoming presidential elections. Even further afield among second-tier credits, Uruguay, which has been frequently in the news as a Greece restructuring precedent, may return to investment-grade status a decade after its voluntary swap given reduced foreign currency exposure and “prudent” economic management. The peso is closely correlated to the Brazilian real, but offshore banking is also a haven from Argentine flight in an historic pattern that may settle from 2001’s deviation.
Thailand’s Cascading Confidence Drains
2011 November 18 by admin
Posted in: Asia
Thai bonds and equities, after spurting on Prime Minister Yingluck’s quick coalition-building and appointment of experienced private sector hands in the economic cabinet, reverted to net outflows in Q3 accompanying a decade-worst baht drop subsequently aggravated by record flooding which has inundated Bangkok and the surrounding region. The annual GDP growth forecast has again been shaved to under 4 percent as companies in the industrial parks which equip the global auto and computer supply chains have shut down without backup facilities in place. The administration’s plans to upgrade infrastructure, including bridges and drains, had aided $7 billion in FDI commitments, double the 2010 total, and the $25 billion package will now be expedited and tax credits will be offered to affected local and foreign firms for lost business. Japan’s Bank for International Cooperation will chip in to help exporters there. Altogether an estimated 1000 factories have been ravaged by the 40 percent above average rainfall, and both rural and urban dwellers face a rising death and disease toll as the government scrambles to install barriers against the waters along the capital’s main river artery and elsewhere. Despite the city center staying relatively dry, mass visitor cancellations have repeated after last year’s bloodshed, and closure of the former international airport which has been converted into a shelter. The critical rice crop will also be hit which could push inflation to 5 percent, well above the central bank target and increasing the cost of a subsidy promised by Yingluck during her campaign. A minimum wage hike to $10/day was likewise a core element of the platform, although many small enterprises opposed it as unaffordable. The coordinating minister for economic policy argues it will boost consumption and the hike will initially apply in a handful of provinces.
The change may not cover the lowest-paid foreign workers, especially from neighboring Myanmar, which has recently moved tentatively to alter its pariah diplomatic and investor status. The military has stepped back from total control with a functioning parliament in place, and it rejected a controversial dam project backed by longtime ally China. Nobel prizewinner Aung San Suu Kyi remains free from house arrest and regularly speaks in public, still insisting on trade sanctions against the regime. A special US envoy has met with top officials and an IMF mission arrives to engage in dialogue over the multiple exchange rate and other issues. A cross-border gas pipeline owned by France’s Total has contributed to foreign reserves over $6 billion, and export taxes have been cut. Indochina observers note that shunned authoritarian rulers in Laos and Cambodia have followed Vietnam in opening stock exchanges after embarking on primordial privatizations as undertaken in Yangon, although activity may be isolated and rigid.
The Financial Stability Board’s Shaky Ground
2011 November 17 by admin
Posted in: Global Banking
A 25-member task force commissioned at the November 2010 G-20 meeting to survey developing and emerging economy issues under the auspices of the Financial Stability Board submitted its report in advance of the Cannes gathering, highlighting gaps in areas ranging from international banking standards adoption to non-bank and capital markets commercial and regulatory development. Their combined bank assets are almost one-third of the global system, but activity is typically less complex and diverse with limited oversight and infrastructure capacity measured against developed country parameters. Foreign currency and ownership are often pervasive, and the shallower local investor base affords lower liquidity and greater disruption risk when private lenders and fund managers abroad lose confidence. All regions subscribe to the BIS Core Principles, although few had fully incorporated the multi-pillar Basel II version before its 2009 effective date which has now been superseded by the post-crisis Basel III proposals setting capital adequacy and liquidity ratios over the next decade. Supervisors often lack corrective action tools and means to assess operational readiness, and securities market enforcement and surveillance is weak posing a threat in universal financial services groups, which may in turn be linked to industrial conglomerates. Cross-border networks are even harder to monitor, and home and host country communication and information-sharing has been uncertain despite the signature of cooperation agreements. The EU has its own accord and Asian, Latin American and African officials have bilateral and multilateral pacts on consolidated approaches with mixed results in practice. Only half of eligible members have ratified IOSCO’s collective memorandum of understanding, and the IAIS insurance body has just launched such an effort.
Non-bank licensing for institutions ranging from specialist consumer and mortgage lenders to microfinance, foreign exchange and mobile money houses has been uneven, although such sources may handle 15 percent of deposits and intermediary transactions in the aggregate, the World Bank estimates. Data collection and reporting lag on these industry segments targeted by the aid community for additional analysis and prudential rules. Foreign exchange mismatches remain a problem as hedging mechanisms and spot and forward trading have evolved slowly. Central bank restrictions on open positions can offer protection, but derivatives may fill an important need as part of money and debt market deepening. Expanding the domestic retail and institutional investor base, benchmark yield curve creation, market-maker designation, and clearing and settlement modernization are all elements, and the Asian Bond Market Initiative and recent integration of Andean Pact stock exchanges have extended these strategies regionally. The report criticizes the arbitrary nature of intervention by authorities which brought outright closures in the 2008-09 crisis period, and calls for a “structured, transparent” response to price volatility which to date has not been even-tempered.
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Latvia’s Off-Key Chorus Call
2011 November 17 by admin
Posted in: Europe
Latvia, which has been hailed as a IMF-European post-crisis success as it stoically bore punishing austerity moves, saw popular anger pour into the streets as the previous coalition government attempted to reassemble despite the runaway victory of the pro-Russia anti-fiscal consolidation Harmony Center party currently controlling the capital Riga. Legislators deserted the old grouping over its desire to block participation, as the government also faced a backlash from disgruntled foreign investors, including well-known Baltic funds East and Firebird, for preventing voting and compensation at nationalized Parex Bank. The EBRD became a key shareholder after its collapse and issued a grim GDP growth revision for the area with the rolling Eurocrisis halving next year’s forecast to 1. 7 percent. The institution, after marking its 20th anniversary, enlarged geographic reach to include North Africa in response to Arab Spring assistance demands, but warned of deterioration among core members that could slow diversification. Turkey was added as a qualified recipient last year as the current account deficit covered predominantly by portfolio inflows will be 10 percent of GDP, according to officials. In 2012 to bridge the gap, as well as private sector debt owed, $200 billion may be needed as the lira continues to plunge toward 2/dollar despite central bank intervention. With foreign exchange reserves just over $80 billion a defense cannot be mounted indefinitely and the IMF has urged monetary tightening to ensure allocation in a reversal of the current stance. International holding of local bonds is over 15 percent, and to staunch the fiscal deficit authorities have just introduced new alcohol and cigarette taxes as they execute a medium-term strategy to pare public debt. Banks, as main listings on the stock exchange, have been big losers with hefty government bond and consumer lending portfolios regulators have tried to curb. A tougher environment has caused parents in core and peripheral Europe to rethink their presence, which is not bound by the Central Europe-specific Vienna Initiative agreed in the immediate post-2008 period.
EBRD observers believe a return to “graduate” Hungary is possible with the Orban administration renouncing IMF ties and foreign banks now facing arbitrary-rate forint mortgage conversion which may finally force outright withdrawal notwithstanding the Vienna pledge. Erste will take a large write-down there as GDP growth for next year has been adjusted to an anemic 1 percent while the budget deficit will rise to 3 percent. A further sovereign ratings downgrade to junk would remove a chunk of the foreign buyer base of one-third local debt outstanding. The country is the subject of EU complaints over tax, currency and constitutional changes as the regional margin for leniency vanishes.
Doing Business’ Dutiful Insolvency Drive
2011 November 9 by admin
Posted in: General Emerging Markets
With the developed world again in debt crisis mobilization mode, the World Bank’s annual Doing Business publication tabulated record insolvency law revisions in thirty countries from the OECD and Eastern Europe/Central Asia, double the number from last year. By region Sub-Sahara Africa showed a breakthrough with 80 percent of members improving their regulatory environment in ten categories. Overall 120 nations instituted twice that amount of reforms for a 15 percent increase, concentrating on commercial startup registration. A new measure on electricity connection access was added. E-government and consolidated small business approaches are now common in both advanced and developing economies with emerging markets Morocco, Latvia, Korea and Colombia among the leaders in broad progress. In Africa the OHADA treaty was modernized for harmonized legal treatment, while at the opposite extreme Caribbean states embraced few changes. In the decade since the ranking began 80 percent of the 180 destinations tracked in on-the-ground micro-surveys have facilitated business launch with one-stop-shops as in Egypt a frequent platform. Malaysia has been a top performer in investor protection, getting credit, and cross-border trading but lags in other areas. In Mexico and elsewhere results can vary at the municipal level, but a 10-day reduction in licensing time can be associated universally with a 0. 3 percent GDP growth boost. Ecuador and Venezuela were exceptions in moving toward a more unfriendly climate. Rwanda and Georgia were cited for commitments to reaching a critical “frontier” mass encouraging formal entrepreneurship with outside technical assistance and multilateral support. In the latter, administrative and tax burdens have eased but physical security and infrastructure remain impediments. On the bankruptcy front over 100 countries recognize creditor committees, while 50 feature out-of-court workouts and require expert credentials. Future research will focus on women’s participation and foreign companies’ role in domestic regimes.
The updated review came as the IIF released its Q3 reading on emerging market bank lending conditions modeled on the Fed, ECB and Bank of Japan equivalents. Its index dipped below 50 for the first time on “significant deterioration,” particularly in external fund availability. Europe fell to 45, while credit standards tightened in all regions despite higher consumer and industrial loan demand. Half of banks reported stiffer wholesale terms, with previously unaffected trade finance experiencing pressure. Non-performing assets are due to rise in the final quarter with commercial and residential real estate displaying softness along with other core borrower segments illustrating a range of doing business difficulties.
Asean’s Stretched Stimulus Stand
2011 November 9 by admin
Posted in: Asia
The Jakarta exchange veered again toward positive results as the inflation-confident central bank trimmed the benchmark rate 25 basis points while orchestrating simultaneous bond and currency defenses. In September foreigners who have been compelled to hold longer maturities abruptly slashed their one-third local debt share as the rupiah also dropped over 5 percent. International reserves that have doubled since the 2008 crisis to $115 billion were down $10 billion on dual exit and intervention, as the monetary authority took its ownership to 7 percent of government instruments outstanding. It kept 10-year yields constant until a 1 percent spike late in the month as domestic banks and funds too became uncertain over allocation under official support influence. A budget surplus account has as well been used for purchases, but dealers note that bid-offer spreads have widened on lackluster commercial appetite. Securities markets were likewise spooked by overseas repayment problems at the premier Bakrie family conglomerate which could force asset disposals including of valuable coal mines. GDP growth is due to top 6 percent this year, as inflation should stay within the 4. 5 percent mid-range target into 2012 on subsidy reduction suspension. In Malaysia, where the foreign-held bond portion is one quarter the total, the ringitt fell 10 percent from its post-peg high as domestic borrowing was hiked 50 percent for the fiscal year to cover the 5 percent of GDP deficit and increased social and infrastructure spending in advance of likely elections in 2012. Prime Minister Najib has already diluted an arbitrary detention law to win favor after street protests erupted and has offered direct cash transfers to low-income families to overcome economic slowdown. S&P criticized the lack of tax overhaul in the latest blueprint, especially introduction of a general goods and services levy to ease reliance on oil company profits. Sovereign wealth fund Khazanah will issue an inaugural yuan-denominated Islamic bond to underwrite power projects, after a previous attempt was scotched amid unsettled markets. Plantation concerns, which have been popular on the Kuala Lumpur bourse with the run-up in palm oil prices, may be further privatized to raise revenue.
In the Philippines, where remittances from the Gulf have receded, President Aquino unveiled a stimulus package basically advancing existing commitments within an overall deficit position as GDP growth sputtered to 3. 5 percent. Typhoon cleanup will add to costs and as consecutive storms arrived the administration failed to attract acceptable bond auction participation. Monsoon rains coincided with currency decline there and in Thailand, where a monthly current account gap was registered just after the Shinawatra clan regained office on an expensive rural giveaway plan.
Argentina’s Model Victory Stance
2011 November 4 by admin
Posted in: Latin America/Caribbean
Argentina’s bond and stock markets continued at the rear of benchmark indices as President Fernandez took a second term in a landslide and regained full parliamentary control, with triple the percentage vote of the runner-up. The outcome largely mirrored the earlier national primary after opposition parties had shown strongly in state races. A challenge from the son of former President Alfonsin faded as his party could not attract anti-incumbent allies and lacked a clear economic alternative vision and power of the purse to dispense largesse. During the campaign key unions got a 30 percent wage hike, above the privately-estimated inflation figure double the official 10 percent. A dozen consultants who have circulated the higher number face heavy fines under application of loosely-related consumer protection laws, with a handful under outright criminal indictment for “financial speculation. ” An attempt to devise an updated index with IMF technical help, based on prices outside Buenos Aires, has foundered on residual bad blood between the government and multilateral lender, which ended its adjustment program a decade ago prompting a record $100 billion external debt default. The cases are likely to be pressed harder with the overwhelming margin by the administration ticket which tapped former finance minister Boudou as vice-president. A crackdown on informal currency trading with the parallel market premium is also expected, as it undermines the central bank policy of gradual peso depreciation to aid exports and facilitates capital flight which is running at a $20 billion-plus annual clip outstripping the trade surplus.
International reserves are below $50 billion on the outflow and regular interventions, and another $5 billion is earmarked for commercial bond repayment in 2012 from the re-opened swap. Twice that amount is still owed to “holdouts” from the 2010 deal according to US Securities Commission filings, and Paris Club outstanding obligations come to $9 billion with negotiations on hold. With these lingering issues the Treasury Department in Washington has been ordered to vote against future development bank support for the country which has a large poverty profile that serves to justify energy and transport subsidies. While corporates have again tapped overseas markets, a sovereign return, although hinted at for infrastructure projects, will be difficult as funds seek “attachment” relief for state assets in US and European courts to honor untendered bonds. In New York a judge has regularly sided with plaintiffs and bemoaned official behavior, while the BIS in Switzerland has itself been subpoenaed to explain its possession of Argentine reserves. GDP growth will be lower at 5 percent next year, and Chinese trade and investment interest which has been hyped as a regional and western substitute may also languish as the tired Kirchner-Fernandez model enters its second decade.
Central Asia’s Great Game Grimaces
2011 November 4 by admin
Posted in: General Emerging Markets
The IMF issued a mixed forecast for the Central Asia-Caucuses region as Kyrgyzstan held its first contested presidential polls since the 2010 ouster of post-independence leader Bakiyev, and Georgia after lengthy resistance from their previous border skirmish agreed to Russia’s WTO admission. The Kyrgyz race after two years of caretaker government reflected an ingrained north-south split along ethnic lines which had brought hundreds of deaths in violent clashes and calls for reconciliation from both Washington and Moscow with their military bases there. Under a new system parliament will check the chief executive’s power in a breakthrough designed both to relieve popular discontent and attract foreign aid suspended during the bloodshed. Economic policy priorities include a revised mining code and further official debt cancellation as overseas worker remittances struggle to support consumption and the balance of payments. As an oil and gas importer the Fund predicts 5 percent GDP growth next year will be undermined by high inflation and overdue fiscal retrenchment. Energy exporters in contrast, spearheaded by Kazakhstan, will see greater expansion but also danger of overheating with aggressive spending programs. The lender comments that the budget stance often serves to curtail double-digit unemployment, with the youth cohort in particular lacking prospects. According to a separate mission the Kazakh economy will be up 6. 5 percent in 2011 on international reserves, counting the sovereign wealth fund, approaching $75 billion. Inflation is above target at 9 percent despite imposition of price controls, but the banking sector remains fragile despite credit and deposit recovery. NPLs are near one-third of portfolios, and interest income has been accrued for bookkeeping purposes but not received.
Tax obstacles have been removed to write-offs and prudential rules now discourage foreign-currency lending but another round of resolution efforts with proper provisioning and valuation is “critical. ” Reserve requirements have recently been tightened, and more exchange rate flexibility is in order after the formal post-crisis corridor was modified. Fiscal policy should continue to be countercyclical, and more private sector dynamism and diversification could be emphasized to build on strides in Doing Business indicators, the IMF concludes.
The sovereign wealth arm run by President Nazarbaev’s brother-in-law has taken stakes in the biggest institutions and has alarmed foreign investors with requests for increased ownership of flagship hydrocarbon projects after joint venture terms were set. As it marks 20 years of independence with FDI over $100 billion, the harsh BTA international creditor haircuts may as well be revisited and reinforced on sluggish earnings and the inability to locate and seize assets stashed abroad by the former owner, who fell out with the president in a family quarrel amid the area’s sweeping arguments.
Pakistan’s Unwoven Trade Ties
2011 November 3 by admin
Posted in: Asia
Pakistan’s share index kept its year-to-date drop to single-digits as after 15 years of denying reciprocal treatment, travel and trade access will be granted to Indian companies and executives as the country embarks on companion bilateral openings with the EU, China and the Gulf Cooperation Council. Commerce between the two is under $3 billion, and the accord aims to soon double the sum. Talks resumed after suspension over the Mumbai terrorist killings by Pakistani radicals and follow signing of a “strategic partnership” with Afghanistan emphasizing economic and security cooperation. Lawmakers and think tanks in Washington have also proposed a free-trade agenda but meet opposition over possible textile export tariff cuts and exemptions. The industry is the biggest overseas earner and generates one-tenth of employment, but has suffered from the withdrawal of duty-free privileges abroad and chronic power shortages at home. The electricity mess has spawned riots and is a major contributor through subsidies and foregone revenue to the 6. 5 percent of GDP fiscal deficit. Growth is an anemic 3 percent while inflation is quadruple that figure, and with the IMF program still suspended the central bank recently slashed the benchmark rate 150 basis points. Public finances were further strained by another round of colossal flooding and the government is poised to print money to bridge gaps in advance of next year’s parliamentary elections. Plans for an external bond placement, lately mooted in sukuk form to Gulf and expatriate investors, have been indefinitely shelved as CDS spreads are in the upper ranks of the worldwide distressed list. To promote US appetite recommendations by a foreign assistance task force at the Center for Global Development called for regular dialogue with banks and portfolio managers, along with the expansion of political risk and venture capital offerings through OPIC, which is now run by a former JP Morgan Securities director.
Indian stocks in turn continue to be pummeled by interest rate increases to break inflation near 10 percent as the economy slows toward 7 percent on flagging industrial output. The budget deficit could be 5 percent of GDP after second-half borrowing requirements were raised one-third from the original target, while the current account shortfall will not be readily covered by low foreign direct and portfolio inflows. Banks have revealed poorer earnings as the savings rate ceiling has been liberalized after lengthy debate to sharpen competitive challenges. The rupee has drifted toward 50 with only occasional central bank intervention, accelerating the shift of leading conglomerates toward stronger currency locations. However the Ambani’s Reliance Communications has been caught up in the telecoms scandal, and family dynasties in the political realm are also in a transcendent stage as Sonia Gandhi may anoint her Congress Party offspring to lead its next generation.
Ukraine’s Jail Joust Jolt
2011 November 3 by admin
Posted in: Europe
Ukrainian debt was off 10 percent on the EMBI, joining the 40 percent stock market loss as a frontier index laggard, as opposition head Tymoshenko got a 7-year prison sentence for alleged power abuse during her stint as prime minister in a court decision and process roundly condemned by democracy watchers. She was specifically found guilty of striking an expensive illegal gas deal with Russia in 2009, and thousands of her supporters clashed with police when the verdict was announced. EU negotiators, in the final stages of setting a formal partnership with the country, had urged a compromise, but President Yanukovich insisted the judiciary alone would shape the outcome. The disconnect reminded investors of the lengthy non-compliance with IMF demands after receiving $3 billion of the $15 billion agreement, with energy prices again at the center of dispute along with fiscal and pension changes. External debt, approximately half corporate, remains onerous at $125 billion or 85 percent of GDP, and T-bill redemptions next year are also $4 billion to sustain local deficit spending. After a loan from Russia’s state-owned VTB and expectations the Fund relationship would resume a Eurobond was floated several months ago, but international reserves dropped 10 percent in September to revert to the end-2010 level on capital flight and efforts to defend the 8 to the dollar currency line. The sum comprises two-thirds of short-term foreign debt due, and CDS spreads widened toward 950 basis points on an imminent squeeze as the government admitted to just “months” of sufficient funding. The hyrvnia is forecast to dip again to the crisis 10 threshold on the political and diplomatic aggravation of economic and financial tensions, with Western unease likely to postpone the arrival of a fresh mission from Washington to get the multilateral arrangement on track.
Moscow, despite urging Ukraine to join its new Eurasian Union with Belarus and Kazakhstan, also criticized the proceeding insofar as it questioned sensitive gas sales, with Prime Minister Putin now running again for president using the phrase “counterproductive and dangerous. ” The ruble too is at risk after a 15 percent drop since August as capital outflows through Q3 reached $50 billion. Finance Minister Kudrin, who has served in the post for a decade, was dismissed after he expressed reservations about budget policy and unwillingness to continue another term, and the central bank spent $10 billion intervening to preserve the dollar-euro basket. After divulging his re-election intentions, Putin spoke to a global business forum with a commitment to “further fiscal discipline and liberalization of strategic industries. ” Foreign companies were wary and Russian ones, preoccupied with repaying overseas creditors $30 billion by December, have other pledges in mind.
FTA Passage’s Passing Glance
2011 October 28 by admin
Posted in: General Emerging Markets
After 5 years of stalemate the US Congress in one swoop approved pending free trade agreements with Korea, Colombia and Panama coinciding with a state visit to Washington by Korean President Lee, briefly moving financial markets which had long ago latched on to bigger economic issues. The Seoul accord had been originally scheduled for signing during its hosting of last fall’s G-20 meeting, but lingering loopholes over financial services, autos and agriculture were in dispute. Foreign banks have been sensitive to rigid labor practices, with Standard Chartered recently facing a high-profile walkout over proposed changes, while the Texas-based Lone Star Funds’ controversial takeover and subsequent sale of a major local lender has brought both diplomatic recriminations and criminal charges. Recently the Achilles heel of private sector reliance on short-term external debt was again on display as the won nosedived 10 percent in September on heavy debt and equity selling led by Europeans. Despite the re-imposition of withholding tax, foreign investors who have traditionally been active stock buyers have moved into bonds to the extent of taking almost one-fifth the total. International reserves have recovered from 2008’s contingency to surpass $300 billion, but the ratio of near-term obligations to the amount was 200 percent at mid-year, according to the central bank. European banks supply near 40 percent of funding to the sector, and stress-tests were ordered by the regulator to examine the effects of an overseas borrowing squeeze as the continent attempts to sort out its liquidity-solvency predicament. The inspections began just after tumbling housing prices forced a rescue of specialized saving banks that operate in jurisdictions across the country. In the capital anger over the property plunge has promoted the candidacy of an entrepreneur without political party affiliation as mayor. Industrial output and exports are also down as interest rates hold firm.
Colombia and Panama were both strong performers on the EMBI before the FTA endorsement, as the former was lifted by a return to sovereign investment-grade rating and President Santos’ push for new fiscal responsibility and mineral royalty laws. The peso has only declined slightly against the dollar and future intervention will be limited, the monetary authority has signaled. The 5 percent GDP growth forecast is intact and unemployment is below 15 percent, although killings and violence have again accompanied end-October local elections. Panama’s debt went to top quality last year and Canal, construction and tourism revenues are all humming to bring expected 7-8 percent output expansion. The treaty must be ratified by the legislature and offshore finance center status, which was formerly marred by money laundering accusations, could see a cleaner route ahead.
Brazil’s Determined Exchange Rate Dump
2011 October 28 by admin
Posted in: Latin America/Caribbean
As GDP growth stalled to 3 percent on poor retail numbers setting the stage for deeper interest rate cuts, Brazilian Finance Minister Mantega shifted the “currency war” to another front with a WTO request to authorize anti-dumping penalties against countries engaged in unfair competitive devaluation including through quantitative easing. The real fell back to 1. 8 to the dollar as the threat was tabled as the worst performing emerging market unit, with net debt and equity outflows extending their streak which began with stiffer overseas borrowing and derivatives curbs. In the US, trade unions have long advocated for such sanctions at the multilateral body as results have been unavailing from unilateral reprisal as embodied in Senate legislation imposing tariffs against identified “manipulators. ” China briefly allowed the yuan to surge a daily extreme in reaction to the bill as the Treasury Department again postponed its semi-annual report on sensitive exchange rate relationships. The delay came ahead of G-20 and APEC summits, and raised the ire of opponents to replenishing development bank funding calling for a harder line against chronic-deficit trade partners. Brazil itself although reliant on Chinese commodities demand runs an overall current account deficit which has been offset by steady FDI. The central bank, which has seen its reputation eroded from the monetary turnaround under exporter political antagonism, was not in a position to condemn other authorities’ interference as it embarked on a series of spot and swap defenses. The situation may have parallels with 2008, with some companies experiencing dollar-denominated distressed debt spreads, and longer-tenor local instruments foreign-held in a greater proportion than the 12 percent aggregate vulnerable to selloffs which may not re-engage with enduring inflow taxes. In Mexico, in contrast, international participation absorbing 40 percent of term paper stayed relatively firm, despite the peso off 10 percent and Cemex’s corporate offering spiking to a 20 percent yield as it also reportedly breached covenants. Inflation hovers around the 3 percent target and will not noticeably worsen with depreciation according to the central bank, as it pledged to avoid intervention and capital restrictions with the ability to tap a $50 billion IMF contingency line.
Poland is as well equipped with this capacity as it was forced into rare zloty support prior to elections which saw a handy second term victory by the ruling coalition, sparking a rally. International investors’ 30 percent ownership of local bonds exceeds private pension funds where the state has pared its contribution to observe the 55 percent of GDP constitutional debt limit. Prime Minister Tusk declared reinvigoration of his party’s original fiscal reform drive as he too petitioned for relief.
Dubai’s Diluted Safe Haven Potion
2011 October 28 by admin
Posted in: MENA
UAE shares rallied toward the plus column as trade, tourism and banking deposits were diverted from elsewhere in the region to lift non-oil GDP growth to 4 percent despite continued Dubai debt wariness. Federal support is expected as a backstop even as an initial restructuring facility expires, with the budget break-even price for petroleum exports at $80/barrel. However Eurozone lending to the GCC, which has been cautious since the 2009 repayment moratorium, has shown further signs of caution on big infrastructure projects with French banks in particular less active in Qatar and Saudi Arabia energy ventures and requesting further collateral as overall Mideast quarterly cross-border credit totals dip below $10 billion. A refinancing for DP World’s port unit commanded a margin at double the previous arrangement, while the emirates’ sovereign wealth fund also saw the cost of a $3 billion package rise to 350 basis points over Libor. Bond yields on the HSBC-Nasdaq benchmark index jumped to 5. 5 percent in October. The national airline has turned to local rather than foreign banks and Chinese official providers have also entered the mix. The NPL ratio will increase to 3 percent next year, according to leading local institutions including Emirates NBD, which recently took over the bad assets of rescued Dubai Bank after its own chief executive was replaced in a ruling family shakeup. Government spending cannot serve to stoke domestic demand and pre-empt popular disquiet as in the Saudi and Qatari cases, where salaries and subsidies have climbed sharply. The two are also the main sources of $10 billion in medium-term assistance to Bahrain and Oman as they struggle to overcome political and economic regime challenges. Oil producers in the MENA area generally, including Algeria, Iraq and Kuwait, have boosted outlays approximately 7. 5 percent of GDP since the troubles and the fiscal scope may narrow next year as commodity revenues taper and foreign asset holdings in the developed world show shrinking returns.
OPEC policy is further complicated in 2012 by Iran’s presidency, with its oil minister the former head of the commercial arm of the Revolutionary Guards which controls top companies on the stock exchange. Capitalization has doubled to $120 billion over the past year as a string of state enterprise sales sustains an upward trend despite diplomatic squabbles over the alleged nuclear bomb program and terrorist backing. Over the counter and online trading alternatives are available, and despite a scandal in the sector which has implicated the President’s allies, another bank IPO recently took place to enthusiastic retail and institutional subscription, although the line between state and private control has essentially vanished in the internal war for deposits and power.
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Frontier Africa’s Wilderness Trek Trails
2011 October 21 by admin
Posted in: Africa
Sub-Saharan markets continued their drag on the MSCI Frontier Index with Kenya off 40 percent in dollar terms at the bottom of the pile as officials sought emergency IMF credit to stem a shilling shellacking past 100 to the dollar as the central bank resorted to a 400 basis point rate rise to 14 percent to counter double-digit inflation. The authority had resisted drastic moves since early in the year, insisting that monetary policy could not address embedded steep food and fuel costs and was widely criticized for interbank intervention moves instead aimed at punishing “speculators. ” T-bill rates have tripled since 2010 knocking the wind out of equities with slumping volume and the lowest valuations in a decade. Plans for a maiden external sovereign bond have again been shelved as the government turns to tax-free infrastructure instruments to plug budget gaps, the latest aimed at individual diaspora investors. Attention has shifted to upcoming elections that hope to avoid a repeat of the last race’s controversy and carnage, with several cabinet members after lengthy investigations facing human rights indictments from the Hague tribunal. GDP growth will roughly match the annual population jump at 3 percent as rural drought has brought large internal displacement alongside the cross-border influx in war-torn Somalia and new movements from Uganda and Malawi following political unrest there. Protests have erupted in both places against authoritarian incumbents at the same time prices for respective commodity mainstays like coffee and tobacco have softened. Uganda’s longtime leader Museveni has been buoyed by the discovery of oil, but opponents draw a contrast between his decades-long tenure and the peaceful presidential rotation in Ghana which has recently joined the petroleum export ranks. The Accra exchange is flat on world beating GDP growth estimated in the 15 percent range despite a fiscal deficit of 5 percent and mounting arrears that must be cleared under IMF program conditions. The benchmark rate has stayed above 12 percent and the currency is supported by firm cocoa and gold values, but international debt has returned to pre-HIPC levels with $3 billion in Chinese project borrowing.
Zambia, although not in any collective mainstream index, has been the regional frontrunner with a 15 percent gain as anti-Chinese populist Sata takes the helm with the expectation of a greater copper-revenue split. In the presidential contest before, Beijing had expressed a preference for the ruling party standard-bearer but this time it kept a diplomatic distance. Sata as a candidate railed against low-cost imports and local worker treatment, but in victory insisted on welcoming China’s aid and investment. He then proceeded to dismiss the long-serving central bank chief who has clamped down on non-residents’ T-bill access with higher taxes and loan restrictions. Their ownership stake is 5 percent versus a majority portion in the past as old African champions look to reassert control.
Export Powerhouses’ Dented Debt Delivery
2011 October 21 by admin
Posted in: IFIs
The IMF’s September Global Financial Stability Review in a somber tone specifically cited the onset of increased emerging market risk since 2008 as an overlooked contributor, with the “export” of credit risk to global investors with Chinese property companies an important element. It noted that as portfolio and bank-related versions again dominate capital inflows in most regions, volatility and outright flight could again ensue and that corporate external debt in the “search for yield” could be ripe for mispricing and deficient due diligence. Issuance in the asset class at over $150 billion already will hit another record this year, with cross-over demand from US high-yield a major impetus, particularly for neighboring Latin American allocation. Speculative participation is near one-third the total, and accounting and fraud scandals as in Sino Forest’s default could be looming. In China’s case companies have also gone offshore not only to tap cheaper funding with the assumption of yuan appreciation but to escape tighter domestic prudential regulation through administrative and monetary policies. Rapid loan growth there and elsewhere like Brazil and Turkey, especially to households, may invite danger based on recent historical experience, and stress test models point to rising NPLs. Asia could see the greatest spike followed by EMEA, which has so far borne the brunt of the Eurozone crisis, but Latin America will not be spared although its comparatively harsher blow could come from falling commodity prices in a terms-of-trade shock. Bank capital adequacy may be insufficient to absorb these swings, and economic conditions may be less favorable to immediate redress than during the post-Lehman period. The accompanying World Economic Outlook publication has cut developing countries’ GDP growth outlook, and structural fiscal deficits remain large amid climbing inflation and leverage and often “stretched” securities market valuations. Capital controls that have proliferated as an anti-overheating and exchange rate management tool may be “of limited use” in the current risk-averse and pressing financial institution oversight environment, the authors recommend, with “time running out” to properly mobilize political will and policy priorities.
A separate chapter in the document probes hundreds of long-term institutional investors about their post-crisis lessons and preferences, and underscores an emphasis on sovereign credit quality and instrument liquidity and “back to basics” derivatives approach for straightforward hedging. An “ongoing” trend toward emerging market diversification has resumed with equity ahead of debt, but with discrimination rather than a homogeneous segment view. A complementary focus in the alternatives category is commodities and infrastructure, although the ability to exit in all these areas is a lingering impediment that could be further spotlighted with the launch of the latest round of stricter insurance and pension fund guidelines for Europe’s single market as monetary integration otherwise may slacken.
South Africa’s Dangling Discipline Dodges
2011 October 14 by admin
Posted in: Africa
South African shares doubled yearly losses to 25 percent on slumping growth and fiscal signals and the “trial” of firebrand ANC youth leader Malema, who faces punishment for inflammatory race and nationalization rhetoric as President Zuma struggles to define his party and business community positions. His diplomacy has also come under fire as advocacy at the African Union for continental solutions sided with the status quo Qaddafi regime including refusing access to confiscated funds before the rebels took key centers. His call for a cease-fire and “inclusive” government was overtaken by events and challenged national liberation credentials at the same time militant labor and political flanks are promoting massive job creation and wealth redistribution schemes. However mining and manufacturing stagnation aggravated by strikes has pulled GDP growth below 3 percent as inflation and the budget deficit touch 5 percent. The central bank has been on hold with the repo rate at 5. 5 percent as foreign bond-buying halves from last year’s pace with net outflows for equities. The rand has fallen back to 8 to the dollar on ambivalent support and the European crisis connection, and the sovereign BBB+ rating could be undermined by new calculations of near-term public debt reaching 45 percent of output with another 20 percent in quasi-sovereign obligations, mainly from electricity company borrowing. FDI was a meager $1. 5 billion in 2010 and the collective bargaining pact for the textile industry which dropped thousands of jobs this year will set a tone for union relations and competitiveness that could seal the fate of multiple sectors that have already relocated elsewhere in Africa and other regions
Big Sub-Sahara destination Nigeria had been down 20 percent through September as more banks were taken over and the central bank continued to hike rates to keep inflation under 10 percent and preserve a narrow naira-dollar bond around 150 for exchange rate stability. A parallel market premium has resurfaced despite reserve rebuilding to $35 billion which noticeably lags the oil revenue surge. Governors are fighting the replacement of the excess crude account that had been emptied prior to elections with a formal sovereign wealth fund, and argue they are further burdened with a recent minimum wage increase that could send the eventual fiscal gap to 4 percent of GDP, excluding a request from the asset management agency AMCON for additional bad loan resolution resources. President Jonathan, upon winning office in his own right, has assembled a so-called economic dream team at the ministries of Finance, Trade and Petroleum to advance reforms, but the Nigerian World Bank Vice President for Africa regularly refers to the nightmare of “vested interests” against their vision.
Capital Flows’ Capped Wellspring Whirl
2011 October 14 by admin
Posted in: Fund Flows
The IIF’s September Capital Flows survey kept the 2011 total for 30 emerging markets roughly constant at $1. 05 trillion while reshuffling the portfolio debt-equity mix in favor of the former, given the push from interest rates on industrial country instruments “cut to the bone. ” The 2012 prediction is for the same amount, although with another year of 6 percent-range economic growth the portion will decline relative to GDP to 4 percent. FDI will be almost half the sum at $450 billion, overwhelmingly going to China, whose direct investment outflows at $100 billion also reflect the net creditor status of a large swathe of the tracked universe. In contrast, the MENA and Europe regions have been further downgraded, with the latter hit in particular by stock and bond sputtering in Turkey over its record current account deficit and credit expansion. A secular trend toward greater exposure should not be halted by recent selloffs as sovereign re-ratings will continue to elevate developing relative to developed credits, according to the report. In addition to traditional risk metrics, the emerging world no longer seems as historically prone to crises, while the institutional quality in advanced counterparts cannot be automatically presumed as evidenced by the Eurozone rescue and US budget ceiling debates.
In Asia share allocation will slip from 2010’s $120 billion to $70 billion, but private debt components, equally bank and non-bank, will come to $250 billion. India is alone in running a current account deficit while Indonesia’s FDI has quadrupled since 2009. In Europe Swiss-franc borrowing vulnerability is an obstacle in Hungary, Poland and Romania, and Ukraine remains out of compliance with its IMF program and Russia’s election calendar injects unease even with Putin’s intention to reclaim the presidency. Latin America’s overall “resilience” with net private inflows over $250 billion will be tested by Brazil’s continued capital control use, Mexico’s trade and remittance ties to the US and Argentina’s likely extension of the state intervention model into a second President Fernandez term with worsening external accounts and capital flight already features. Monetary policy in the region could switch toward cuts particularly if commodity prices weaken, which is also a danger for Persian Gulf destinations and South Africa. High oil and metals revenue are needed to sustain infrastructure and social spending, and nonresident bond purchases of $4 billion through the first half serve to offset the perennial balance of payments gap despite their consequences for rand volatility.
In a companion annual update on its stable capital flow and debt negotiation principles the group hails the top information dissemination and investor relations scores of Latin American and other issuers and examines restructuring cases in Greece, Dubai, Iceland and Cote d’Ivoire. In Greece the assessment may be complicated by its own role in offering a reduction menu to European authorities to meet desired private sector involvement. The package calculates the principal and interest haircut at 21 percent in a deeper concession than original French and German bank-backed proposals, and while self-congratulations are in order for following the “good faith” guidelines the episode may be far more involved in terms of potential conflict and Eurozone repercussions.
Egypt’s Deauville Declaration Muttering
2011 October 5 by admin
Posted in: MENA
Egyptian stocks budged from their rear MSCI roster position as international and Arab official lenders reaffirmed a previous commitment in Deauville, France for $30-40 billion in near-term aid for MENA political and economic transition, and formally recognized the Libyan interim authority which just before held its own reconstruction meeting. Cairo’s army-controlled government, which has faced renewed street protests as it prepares to stage parliamentary and presidential elections, originally spurned IMF budget and balance of payments funding with minimal conditionality for Gulf cash but has received only $500 million, according to officials, as domestic debt yields have touched the sensitive 13 percent mark in several failed auctions. GDP will contract at least 3 percent this fiscal year and unemployment is at a 5-year high although the tourism slump was only 30 percent in the latest month. Investment was down 25 percent in the most recent quarter, despite a decision by Scandinavia’s Electrolux to carry through with a Mubarak-era deal to acquire a stake in a big listed group. Local retail investors are the dominant bourse presence with lackluster company earnings and thin trading, with circuit breakers prevailing on periodic 10 percent daily declines. Big foreign holdings of both debt and equity have reversed to paltry amounts amid concerns about private sector direction and former regime ally investigations, and a budget deficit due to top 10 percent of GDP on the heavy social subsidy burden and a civil service salary hike. Double-digit inflation has eased with commodity retrenchment, and the current account will again be in shortfall despite foreign reserve depletion having stabilized at $500 million monthly. Banks are the main Treasury-bill buyers and the system has been under negative credit rating review notwithstanding a cautious 50 percent loan-deposit ratio. At the Deauville gathering in May the G-8 pledged $20 billion roughly equaling Arab lines, including $3 billion in Saudi ones which have only partially materialized.
Tunisia, where the stock market is also off has gotten World Bank and EU money, but a $25 billion 5-year plan presented by the Finance Minister, a former Citigroup executive, for infrastructure and job creation was not specifically endorsed. Elections have been delayed with the previously-banned Islamic party ahead in opinion polls, and GDP growth will be barely positive this year. With the troubled Eurozone as its chief trading partner, the current account gap will reach 5 percent of output even with the gradual return of remittances and visits from Libya. External debt is primarily on concessional terms, but additional Eurobond redemption comes in 2012, and the sovereign rating was downgraded in July with a negative outlook on a “cloud of uncertainties” which may also derive from summit puffery.
China’s Spirited Local Aloha Gestures
2011 October 5 by admin
Posted in: Asia
Chinese stocks and bonds sustained their slump as the national auditor, which had found RMB 11 trillion in authorized local government loans outstanding, reported detailed debt-GDP ratios in Hawaii resort-like Hainan and other provinces ranging from 50-70 percent. In northeast Liaoining the office revealed that 85 percent of funding platforms missed payments last year. A small portion through separate commercial structures issued bonds even with official bans on municipal engagement, and creditors have complained of asset diversion and forcible restructuring on problem projects. Banking stocks have been battered on the mutually-reinforcing combination of property and provincial exposure, although the regulator has blurred the classification standard in setting the respective totals within the overall NPL number under 5 percent. The low-cost housing campaign announced in the latest economic plan could aggravate potential danger according to the major rating agencies, with Fitch warning of an outright downgrade after shifting the local currency outlook to negative and Moody’s estimating that the amount at risk could be 30 percent higher than Beijing’s prevailing tally. While investors have shunned the big four giants, privately-run commercial and dedicated regional institutions could be facing the greatest risks. The fear contributed to a lack of foreign buyers for Bank of America’s original stake in CCB, and also may have facilitated Canada-based Scotiabank’s 20 percent acquisition of Guangzhou Bank. Trusts, which had been modernized after prominent collapses during the 1990s Asian crisis, have also been an intermediation tool and many listed companies are believed to have direct local debt commitments through financing arms. Chinese bank P/E measures lag BRIC counterparts, and with inflation stuck at 6 percent monetary tightening in new forms should undermine profitability, with reserve requirement breakdowns recently stiffened.
External borrowing access which was previously seen as a backup channel to lift capital minimums above the Basle III threshold has been curtailed at the same time as high-yield real estate developers and fraudulent firms like Sino Forest head toward default. Corporate governance abuse allegations have resulted in a bevy of US SEC and mainland investigations of so-called “reverse mergers” which have been backed by specialist investment banks and auditors as mainstream allocation alternatives. In Sino Forest’s case, prosecutors in Ontario, which was the listing domicile outside New York, have led the crackdown as bonds fell to 30 cents on the dollar in advance of the inability to honor over $1 billion owed. GDP growth despite solid retail sales and fixed-investment components is now put at 7-7. 5 percent, as the sovereign wealth fund with key export destinations in mind is considering emergency purchase of European peripheral debt as core domestic parallels loom.
Commodities’ Speculative Froth Skimming
2011 October 5 by admin
Posted in: IFIs
In response to France’s call as current G-20 chair for insight and recommendations on the overlap between commodity and financial markets and in particular the impact on price volatility and food security several task forces have reported back with proposed measures. Since 2008 the GSCI Index aggregating energy, agriculture and metals has doubled and assets under management through ETFs and dedicated funds and accounts have reached almost half a trillion dollars. By volume gold listings are the top exchange-traded products and in the US the CFTC regulator had concluded after oil investment investigations that stricter position limits could be needed affecting both industry and portfolio players. Developing and industrial country officials have met twice on the subject and asked groups like the IIF and IOSCO to weigh in on aspects from better data and information to anti-speculative and stabilization mechanisms. The securities supervisors have endorsed greater transparency and access and margin controls in principle without stipulating specific steps. The bankers’ trade association has spurned allocation restrictions while citing overwhelming evidence that swings results from underlying physical imbalances and that “long” index tendencies offset the short price-fall hedges of end-users. The World Bank agreed in a June report that the empirical case for defining and dampening so-called commodity “financialization” was weak and that exchange practice in Chicago and elsewhere for spot and futures activity also introduces distortions. Increased correlation between asset classes throughout the past five year crisis period has heightened correction severity generally. Emerging economies led by China have become leading raw material consumers, and food availability has been impaired by poor harvests and distribution channels as well as competing demand for grain-based fuel. Export bans in Asia and Europe have also hindered supply, while “resource nationalism” changing mining rules for foreign producers has affected metal values.
Developing countries acting through UNCTAD have nonetheless insisted on stricter financial intermediary oversight and an outright ban on proprietary dealing in the commodities space and urged reconsideration of 1980s vintage global price-stabilization arrangements which unwound at the time of the debt crisis which then almost sank major banks. The UK and EU are reviewing their approaches with the MiFID guidelines on cross-border investment likely to incorporate specialist adjustments for derivatives exposure and reporting. The World Bank’s IFC arm has meanwhile sponsored an agricultural risk management instrument that will allow up to $4 billion in farmer hedging, following President Zoellick’s prompt to “better use and not block markets. ” As with the Basle III capital and liquidity standards the IIF has warned of higher costs and “unintended consequences” from new rules that may match commodities’ sudden sweep.
Brazil’s Surreal Salvation Script
2011 September 22 by admin
Posted in: Latin America/Caribbean
Brazil’s currency and capital markets careened as the central bank after official and exporter hectoring abruptly slashed the benchmark interest rate 50 basis points and raised the inflation forecast to 5 percent as GDP growth expectations were pared to the 4 percent range, despite upbeat labor and retail indicators. The Rousseff Administration had already been criticized for a stream of cabinet departures which has conveyed endless reshuffling and seeming contradictions between commitments to restore a 4 percent of GDP primary fiscal surplus and launch new industrial policy measures including trade restrictions and targeted credit to help designated sector competitiveness. Governor Tombini couched the turnaround in terms of a revised policy methodology according greater weight to the deteriorating global economic outlook, but many investors who have pared debt and equity positions following the Finance Minister’s serial imposition of taxes fretted that the government’s short-term popular overtures had again held sway, and that the monetary authority had relinquished a longstanding autonomous and liberal reputation. They note that full currency convertibility has disappeared from the agenda and that the body was silent on a proposal to gather other BRIC members in a European-bond buying operation when the domestic debt level is still steep and even the most conservative foreign players, the Japanese investment trusts, are reducing exposure. Banks, in particular, have been shunned on the exchange as NPLs creep over 5 percent with many listings off 25 percent as macro-prudential limits on credit card issuance go into effect with repayment burdens eroding household spending power. In the space, BTG Pactual however generated excitement with a plan to go public and expand cross-border through tie-ups with Chilean and Colombian brokers. Skeptics fired back that numerous IPOs have been withdrawn in recent months and that the move outside Brazil could also be to escape worsening asset management and underwriting foundations.
Neighboring Argentina has frowned on the possible real-weakening impact and Mexico has also hinted it could cut rates as both countries head into their own presidential election cycles. In a national primary Argentine incumbent Fernandez took a commanding 50 percent after earlier provincial setbacks, paving the way for a cinched second term despite relentless capital flight and inflation. With pre-poll budget outlays increased 30 percent, tariffs have just been raised against Brazilian goods to win voter support. Mexican Finance Minister Cordero has quit to seek his party’s nod although the once dominant PRI is set to return to power, according to current opinion readings. In the 2012 fiscal blueprint just submitted no major tax reforms are contemplated even as the US-linked security and export design remains sketchy.
Turkey Flotilla Flotsam Formation
2011 September 22 by admin
Posted in: Europe, MENA
Turkish shares continued as emerging Europe’s worst as the Finance Minister characterized the 10 percent of GDP current account deficit with the lira’s 20 percent slump as “yesterday’s problem,” and geopolitical anxiety spread with ruptured Israeli ties over past treatment of a seized Palestinian aid ship. Erratic central bank policy has been rattling investors as an innovative mix strives to slow credit growth and discourage high-yield debt inflows, while preserving domestic demand and balance of payments coverage with the surrounding Eurozone debacle. Consumer loan growth has been just over 1 percent monthly pointing to success, but Q2 GDP was up again at a torrid 10 percent pace and repatriation of Turkish capital from abroad has supplemented decreased foreign allocation. A dollar intervention fund had been suspended but was recently reactivated not to curb appreciation but to support levels officials argue are 10 percent undervalued. President Erdogan after comfortable re-election has injected his administration heartily into Mideast tumult with criticism of Syria’s repression and praise for Libya’s Qaddafi ouster in addition to the dispute with Tel Aviv, which has hurt the exchange there alongside a domestic protest movement over housing costs and international controversy over a UN bid for Palestinian Authority statehood. The Israeli economy has softened to a 3 percent growth clip and the shekel has slid as a round of rate cuts is previewed. The heavy export reliance on high-tech and defense goods could suffer under global cutbacks, and at home the Netanyahu team is under pressure to break-up family conglomerates which dominate business and finance.
Relations have also frayed with Arab neighbors in transition, including Egypt now under military rule, where Sinai border attacks have been mounted, and Jordan and Lebanon with their own fragile governments. King Abdullah has introduced constitutional changes to give parliament more power, but has turned to $10 billion in Gulf aid to plug a runaway budget gap. Lebanon’s triple-digit sovereign debt load depends on bank placement, and deposits have flat-lined with GDP growth at only 1. 5 percent and the Syrian spillover. The Hezbollah faction in the coalition has refused to hand over accused killers of former Prime Minister Hariri named in a years-long international investigation. Iran’s role in the area hangs over the interplay with the US army also due to exit Iraq by year-end where a new hydrocarbons law was just endorsed after 5 years of negotiations. Production has reached almost 2.
In Tunisia the main Islamic party won handily in the initial political transition phase, and a counterpart was biggest vote-getter in Morocco’s monarchy-sanctioned exercise for a parliament with greater power. The Libya conflict will seal Tunisia’s recession as its rating is maintained on negative outlook and a large Eurobond comes due in 2013. At the opposite end of the troubled state output scale in the region Iraq on restored oil production is up 6 percent, but Baghdad has recently challenged Kurdistan over license awards to multinationals in a perennial politically-sensitive issue. From a security standpoint, the bulk of US troops are slated to leave soon but the stock exchange rally has sputtered on fears Iran incursions could join enduring inter-ethnic enmity as sand in the gears.
Private Equity’s Driven Deal Display
2011 December 1 by admin
Posted in: General Emerging Markets
The Emerging Markets Private Equity Association reported that Q3 fundraising through 120 sponsors had returned to the pre-Lehman level year to date at over $30 billion, a $10 billion jump over all of 2010. China-focused offerings took three-quarters of the total, while Brazilian ones took a record $4. 5 billion. 650 transactions over the period came to $20 billion, and the developing market fraction of the global total is 15 percent. With Europe’s crisis, capital mobilized has dropped under $1 billion there, with only $60 million put into Russia. Sub-Sahara Africa has drawn more at $1. 3 billion, quadruple the MENA region attracting $350 million, down one-third from last year. South Africa in turn has taken in just $100 million, one-quarter 2010’s commitment. Asia accounts for the most deal-making with 75 percent of the aggregate, although its activity is less than 10 percent the worldwide sum. China and India dominate, but PE investment as a share of GDP is 0. 15 percent and 0. 4 percent, respectively. India’s penetration is the highest among major economies, while Mexico’s and Turkey’s rank at the bottom. Turkish companies’ leverage has been a deterrent, with $60 billion in overseas loans due through the middle of 2012, according to the central bank. For the biggest emerging market corporates generally, record international bond payments of $55 billion are owed and recent exchange rate corrections could aggravate the burden.
In Central and Eastern Europe limited partnerships have begun scouting for openings with the likely pullback of Eurozone-based cross-border groups which comprise at least two-thirds of the system in Hungary, Poland, Bulgaria and elsewhere. Originally they had agreed as an extension of EBRD, EU and IMF support to keep their presence and portfolios essentially intact, but parents like Austria’s Erste now clearly intend to repudiate the pledge under earnings and Basel and European supervisor capital-raising goals. The fallout may extend to Spanish giants BBVA and Santander’s operations in Brazil, Chile, Mexico and Argentina. Last year a Brazilian unit IPO had been oversubscribed, but the stock market index and flotation pipeline have since cooled. Euro area bank claims there are almost one-quarter of domestic credit and household debt service levels merit comparisons with the US in the subprime heyday. Number one target China has also come under harsh banking criticism in its first IMF stability assessment as venture firms weigh economic, property, and local government risks. It questioned the oversight and performance of the state-owned commercial behemoths, and cited the system danger of multiple shocks that could include a sudden exchange rate shift which may again be in the startup phase with bilateral and WTO complaints.
Greek Banks’ Nihilistic Network Effects
2011 November 29 by admin
Posted in: Europe
Greek banks, that will suffer most as the largest group of commercial holders under a proposed 50 percent government debt haircut, reported deposit leakage of almost 15 percent this year as household lending was off 18 months consecutively. They have turned to the official guarantee scheme authorized under the original EU-IMF package to access ECB lines as branches in the main Athens protest areas have been abandoned and defaced. The big three groups in nearby Cyprus were again downgraded several notches by rating agencies on sovereign, retail and corporate exposure. Moody’s commented that with 40 percent of their portfolios at risk, state support could soon be needed despite its own chronic deficit with unchecked salary and pension outlays. Modest reform measures introduced after recent post-election leadership changes will leave a 2 percent of GDP gap, which may again have to be met through Russian bilateral loans as an extension of their longstanding offshore interests on the divided island. Before the banking crisis, authorities had to contend with tepid tourism and property sales off 20 percent, and a gas storage tank explosion that cut energy supply with heavy cleanup costs. Reunification talks with the Turkish side are also at a worsening impasse after the discovery of hydrocarbon deposits in disputed waters. Balkan neighbors Bulgaria and Romania have tried at the same time to offer reassurance about Greek-intensive financial institution health. In the former non-performing loans 3 months overdue are already at 15 percent, and the railway was just forced to shed thousands of workers to avoid bankruptcy relying on World Bank support. The Romanian central bank, with the comfort of a new IMF agreement, resorted to monetary easing on anemic GDP growth and urged further privatization efforts to free funds after a review cited “unsatisfactory” progress.
In Hungary, Greece references have resurfaced after that scenario was posed by Orban administration officials right after they took office with public debt at 75 percent of GDP. In 2012 foreign repayments will jump 50 percent to $6. 5 billion as the post-2008 IMF emergency loan comes due, and budget deficit and growth projections have both turned worse. Along with the fixed Swiss franc mortgage conversion program that may draw on reserves and require backing for state-owned top stock exchange listing OTP, municipal foreign-currency debt has also been assumed. The forint has dropped beyond the critical 300/euro level and local bond auctions have been lackluster and occasionally failed with premium demand and non-resident withdrawal from their previous one-third ownership stake. The government has wooed Chinese interest as an alternative, and invited their membership as primary dealers to meager results in a Sisyphean effort.
Cote D’Ivoire’s Default Remedy Dalliance
2011 November 29 by admin
Posted in: Africa
Cote d’Ivoire external bonds rose above 50 as the IMF resumed a $600 million credit facility with one-fifth the amount immediately available, even as the Finance Minister pushed the first repayment date on missed interest coupons since early this year to the middle of 2012. It also offered interim debt service relief as a new accord is negotiated with Paris Club bilateral creditors as part of a longstanding HIPC completion point push. Former President Gbago and his allies face trial although international human rights investigators found violations on both sides during the civil war. A reconciliation commission will convene after parliamentary elections in December as security forces try to reassert command over the north-south geographic and tribal divide. A more comprehensive restructuring on commercial debt principal has not been ruled out as economic indicators point to a 6 percent GDP decline this year on inflation around the same range, and state banks suffer from spiking NPLs. Their asset side, with large government securities concentration, was saved from further calamity when the West African central bank stepped in as a buyer, also supporting prices on the Abidjan-based regional bourse. Cocoa trade with big multinational buyers is again on stream after the brief boycott, and sector reform is a key structural aspect of the Fund accord, with President Ouattara’s advisers leaning toward a public-private mix which could inject efficiencies, while bringing in additional revenue for the chronic budget and current account gap. Anti-child labor activists have also demanded detailed monitoring and reporting of field practices, with US-listed companies facing possible supply chain verifications as with Congo’s minerals, where a conflict-free mandate was inserted in the Dodd-Frank law.
Another Sub-Sahara issuer joined the global sovereign ranks as Namibia came to market for $600 million, with neighboring South African institutions eager bidders. German vestiges there have inspired fiscal and monetary discipline, and the post-independence period saw an early example of peaceful transfer of power. Angola, with its own national liberation movement legacy, is often listed as a next candidate after getting the latest tranche of its $1 billion IMF loan conditioned on greater oil earnings transparency. Nigeria could come soon with a diaspora-targeted instrument championed by the Finance Minister when she was at the World Bank. Fitch boosted the outlook on the BB-minus rating to stable with the smooth election aftermath, and the central bank has hiked benchmark rates by several hundred basis points at a clip to defend the naira at 150-55 to the dollar and limit inflation to single-digits. A sovereign wealth fund with a professional board of directors with an initial $1 billion endowment is to replace the mishandled excess crude account which was often described as crude in its excesses.
China’s Delicate Dim Sum Dismay
2011 November 25 by admin
Posted in: Asia
The standout securities frenzy associated with trial yuan-denominated “dim sum” offerings in Hong Kong has joined wariness in other segments as credit risk specialists demand greater disclosure and standardization of Chinese company bonds, and daily currency volume to support the market is off one-third to $1 billion. Before the pullback less-known unrated names had tapped the channel as the currency continued to appreciate in its dollar band in part to blunt trade partner “war” attacks. Since September the 6. 3 rate has been relatively constant as authorities, responding to export slowdown, call the exchange rate “basically reasonable. ” The global spillover from the Eurozone crisis has caught investors and traders with illiquid positions for the new instruments, and the yuan portion of Hong Kong bank deposits at 10 percent has not changed since its rapid initial surge. The Cannes G-20 meeting reaffirmed a pause in Washington-Beijing confrontation after a Senate bill brandishing retaliation over alleged “manipulation” was stuck in the other chamber, and the Treasury Department again passed on reaching that conclusion with a delayed biannual report. The group communique mentioned the desire for flexibility, but dropped previous criticism of current account imbalances beyond a designated fraction of GDP. Among group members, China has entered over RMB 1 trillion in trade-related swap facilities, including with Korea, Russia and Argentina, and settlement can be extended to the capital account on outbound FDI which came to $70 billion in 2010. Access widening is planned as well through the respective institutional investor QFII and QDII schemes, with a particular stress on promoting internationalization to reduce dollar and euro official reserve reliance. The peril of such holdings was underscored by the recent approach from EFSF representatives for a large commitment to an expanded the rescue fund when Chinese portfolio managers are ambivalent about its current bond pipeline.
Weaker industrial output has tweaked the GDP growth forecast to the 8. 5 percent range, but the inflation fight with credit and property crackdowns and a raw material cost respite took it to 5. 5 percent. Despite pleas for monetary release, Premier Wen insisted real estate curbs would remain indefinitely as major developers head for serious squeezes and likely bankruptcies. An exception was made for credit-starved small businesses which have often turned to gouging informal lenders, and local governments have also been approved to issue bonds instead of depending on banks. Shanghai and Guangdong province have been chosen for pilot exercises with many foreign investors recalling the latter’s default through its trust company arm during the Asian financial crisis. Local banks also had to be recapitalized due to such debacles, and the leadership there and at the industry regulators has begun to rotate ahead of next year’s party congress arranging the complex political and economic platter.
Guatemala’s General Menacing Streak
2011 November 25 by admin
Posted in: Latin America/Caribbean
Former General Molina won the second round presidential runoff over business executive Baldizon, briefly boosting external bonds which must soon be rolled over as both candidates proclaimed centrist economic policies and a law and order stance against drug traffickers and kidnappers. The BB sovereign rating outlook had recently been downgraded to negative on security dangers and the persistent tax revenue to output gap threatening 3 percent medium term fiscal deficits. GDP growth and inflation are likewise running at 3 percent, as the central bank projects an almost 10 percent remittance rise to $4. 5 billion to counter a $1 billion higher trade shortfall. Commodity, tourism, and financial services earnings have held up despite the worsening violence condemned by the UN’s reconciliation monitors and other observers. Volcanic eruptions have also repeated the specter of natural disaster after heavy reconstruction costs from previous episodes.
Next-door El Salvador, which has a precautionary standby with the IMF, faces similar physical fears with the first lady traveling to Washington in November to seek support from the expatriate community and development agencies. With the dollar the official currency, household expense increases have caused 5 percent inflation on economic growth less than half that figure. Banking cleanup has progressed, but the structural reform pace will slacken ahead of next year’s congressional elections which may swing back to conservative party dominance under tough unemployment and poverty conditions. In Central America a contrast is often drawn with safer and wealthier Costa Rica where GDP expansion is double at 4 percent on buoyant hospitality and free-zone inflows. The current account deficit has swelled to 2 percent of output, but is offset by foreign investment in telecoms and hotel projects. President Chinchilla was educated in the US and garners attention as a female head of state on the area, but domestic debt continues to advance under her watch inviting rating agency caution.
In the broader geography, the Dominican Republic, as a member of the DR-CAFTA free trade pact, is cited as more attractive with its public debt at 30 percent of GDP and good marks on its 3-year $1. 5 billion IMF program. Visitor revenues are up 5 percent on an annual basis and FDI should jump one-fifth to $2 billion and should remain unaffected by upcoming presidential elections. Even further afield among second-tier credits, Uruguay, which has been frequently in the news as a Greece restructuring precedent, may return to investment-grade status a decade after its voluntary swap given reduced foreign currency exposure and “prudent” economic management. The peso is closely correlated to the Brazilian real, but offshore banking is also a haven from Argentine flight in an historic pattern that may settle from 2001’s deviation.
Thailand’s Cascading Confidence Drains
2011 November 18 by admin
Posted in: Asia
Thai bonds and equities, after spurting on Prime Minister Yingluck’s quick coalition-building and appointment of experienced private sector hands in the economic cabinet, reverted to net outflows in Q3 accompanying a decade-worst baht drop subsequently aggravated by record flooding which has inundated Bangkok and the surrounding region. The annual GDP growth forecast has again been shaved to under 4 percent as companies in the industrial parks which equip the global auto and computer supply chains have shut down without backup facilities in place. The administration’s plans to upgrade infrastructure, including bridges and drains, had aided $7 billion in FDI commitments, double the 2010 total, and the $25 billion package will now be expedited and tax credits will be offered to affected local and foreign firms for lost business. Japan’s Bank for International Cooperation will chip in to help exporters there. Altogether an estimated 1000 factories have been ravaged by the 40 percent above average rainfall, and both rural and urban dwellers face a rising death and disease toll as the government scrambles to install barriers against the waters along the capital’s main river artery and elsewhere. Despite the city center staying relatively dry, mass visitor cancellations have repeated after last year’s bloodshed, and closure of the former international airport which has been converted into a shelter. The critical rice crop will also be hit which could push inflation to 5 percent, well above the central bank target and increasing the cost of a subsidy promised by Yingluck during her campaign. A minimum wage hike to $10/day was likewise a core element of the platform, although many small enterprises opposed it as unaffordable. The coordinating minister for economic policy argues it will boost consumption and the hike will initially apply in a handful of provinces.
The change may not cover the lowest-paid foreign workers, especially from neighboring Myanmar, which has recently moved tentatively to alter its pariah diplomatic and investor status. The military has stepped back from total control with a functioning parliament in place, and it rejected a controversial dam project backed by longtime ally China. Nobel prizewinner Aung San Suu Kyi remains free from house arrest and regularly speaks in public, still insisting on trade sanctions against the regime. A special US envoy has met with top officials and an IMF mission arrives to engage in dialogue over the multiple exchange rate and other issues. A cross-border gas pipeline owned by France’s Total has contributed to foreign reserves over $6 billion, and export taxes have been cut. Indochina observers note that shunned authoritarian rulers in Laos and Cambodia have followed Vietnam in opening stock exchanges after embarking on primordial privatizations as undertaken in Yangon, although activity may be isolated and rigid.
The Financial Stability Board’s Shaky Ground
2011 November 17 by admin
Posted in: Global Banking
A 25-member task force commissioned at the November 2010 G-20 meeting to survey developing and emerging economy issues under the auspices of the Financial Stability Board submitted its report in advance of the Cannes gathering, highlighting gaps in areas ranging from international banking standards adoption to non-bank and capital markets commercial and regulatory development. Their combined bank assets are almost one-third of the global system, but activity is typically less complex and diverse with limited oversight and infrastructure capacity measured against developed country parameters. Foreign currency and ownership are often pervasive, and the shallower local investor base affords lower liquidity and greater disruption risk when private lenders and fund managers abroad lose confidence. All regions subscribe to the BIS Core Principles, although few had fully incorporated the multi-pillar Basel II version before its 2009 effective date which has now been superseded by the post-crisis Basel III proposals setting capital adequacy and liquidity ratios over the next decade. Supervisors often lack corrective action tools and means to assess operational readiness, and securities market enforcement and surveillance is weak posing a threat in universal financial services groups, which may in turn be linked to industrial conglomerates. Cross-border networks are even harder to monitor, and home and host country communication and information-sharing has been uncertain despite the signature of cooperation agreements. The EU has its own accord and Asian, Latin American and African officials have bilateral and multilateral pacts on consolidated approaches with mixed results in practice. Only half of eligible members have ratified IOSCO’s collective memorandum of understanding, and the IAIS insurance body has just launched such an effort.
Non-bank licensing for institutions ranging from specialist consumer and mortgage lenders to microfinance, foreign exchange and mobile money houses has been uneven, although such sources may handle 15 percent of deposits and intermediary transactions in the aggregate, the World Bank estimates. Data collection and reporting lag on these industry segments targeted by the aid community for additional analysis and prudential rules. Foreign exchange mismatches remain a problem as hedging mechanisms and spot and forward trading have evolved slowly. Central bank restrictions on open positions can offer protection, but derivatives may fill an important need as part of money and debt market deepening. Expanding the domestic retail and institutional investor base, benchmark yield curve creation, market-maker designation, and clearing and settlement modernization are all elements, and the Asian Bond Market Initiative and recent integration of Andean Pact stock exchanges have extended these strategies regionally. The report criticizes the arbitrary nature of intervention by authorities which brought outright closures in the 2008-09 crisis period, and calls for a “structured, transparent” response to price volatility which to date has not been even-tempered.
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Latvia’s Off-Key Chorus Call
2011 November 17 by admin
Posted in: Europe
Latvia, which has been hailed as a IMF-European post-crisis success as it stoically bore punishing austerity moves, saw popular anger pour into the streets as the previous coalition government attempted to reassemble despite the runaway victory of the pro-Russia anti-fiscal consolidation Harmony Center party currently controlling the capital Riga. Legislators deserted the old grouping over its desire to block participation, as the government also faced a backlash from disgruntled foreign investors, including well-known Baltic funds East and Firebird, for preventing voting and compensation at nationalized Parex Bank. The EBRD became a key shareholder after its collapse and issued a grim GDP growth revision for the area with the rolling Eurocrisis halving next year’s forecast to 1. 7 percent. The institution, after marking its 20th anniversary, enlarged geographic reach to include North Africa in response to Arab Spring assistance demands, but warned of deterioration among core members that could slow diversification. Turkey was added as a qualified recipient last year as the current account deficit covered predominantly by portfolio inflows will be 10 percent of GDP, according to officials. In 2012 to bridge the gap, as well as private sector debt owed, $200 billion may be needed as the lira continues to plunge toward 2/dollar despite central bank intervention. With foreign exchange reserves just over $80 billion a defense cannot be mounted indefinitely and the IMF has urged monetary tightening to ensure allocation in a reversal of the current stance. International holding of local bonds is over 15 percent, and to staunch the fiscal deficit authorities have just introduced new alcohol and cigarette taxes as they execute a medium-term strategy to pare public debt. Banks, as main listings on the stock exchange, have been big losers with hefty government bond and consumer lending portfolios regulators have tried to curb. A tougher environment has caused parents in core and peripheral Europe to rethink their presence, which is not bound by the Central Europe-specific Vienna Initiative agreed in the immediate post-2008 period.
EBRD observers believe a return to “graduate” Hungary is possible with the Orban administration renouncing IMF ties and foreign banks now facing arbitrary-rate forint mortgage conversion which may finally force outright withdrawal notwithstanding the Vienna pledge. Erste will take a large write-down there as GDP growth for next year has been adjusted to an anemic 1 percent while the budget deficit will rise to 3 percent. A further sovereign ratings downgrade to junk would remove a chunk of the foreign buyer base of one-third local debt outstanding. The country is the subject of EU complaints over tax, currency and constitutional changes as the regional margin for leniency vanishes.
Doing Business’ Dutiful Insolvency Drive
2011 November 9 by admin
Posted in: General Emerging Markets
With the developed world again in debt crisis mobilization mode, the World Bank’s annual Doing Business publication tabulated record insolvency law revisions in thirty countries from the OECD and Eastern Europe/Central Asia, double the number from last year. By region Sub-Sahara Africa showed a breakthrough with 80 percent of members improving their regulatory environment in ten categories. Overall 120 nations instituted twice that amount of reforms for a 15 percent increase, concentrating on commercial startup registration. A new measure on electricity connection access was added. E-government and consolidated small business approaches are now common in both advanced and developing economies with emerging markets Morocco, Latvia, Korea and Colombia among the leaders in broad progress. In Africa the OHADA treaty was modernized for harmonized legal treatment, while at the opposite extreme Caribbean states embraced few changes. In the decade since the ranking began 80 percent of the 180 destinations tracked in on-the-ground micro-surveys have facilitated business launch with one-stop-shops as in Egypt a frequent platform. Malaysia has been a top performer in investor protection, getting credit, and cross-border trading but lags in other areas. In Mexico and elsewhere results can vary at the municipal level, but a 10-day reduction in licensing time can be associated universally with a 0. 3 percent GDP growth boost. Ecuador and Venezuela were exceptions in moving toward a more unfriendly climate. Rwanda and Georgia were cited for commitments to reaching a critical “frontier” mass encouraging formal entrepreneurship with outside technical assistance and multilateral support. In the latter, administrative and tax burdens have eased but physical security and infrastructure remain impediments. On the bankruptcy front over 100 countries recognize creditor committees, while 50 feature out-of-court workouts and require expert credentials. Future research will focus on women’s participation and foreign companies’ role in domestic regimes.
The updated review came as the IIF released its Q3 reading on emerging market bank lending conditions modeled on the Fed, ECB and Bank of Japan equivalents. Its index dipped below 50 for the first time on “significant deterioration,” particularly in external fund availability. Europe fell to 45, while credit standards tightened in all regions despite higher consumer and industrial loan demand. Half of banks reported stiffer wholesale terms, with previously unaffected trade finance experiencing pressure. Non-performing assets are due to rise in the final quarter with commercial and residential real estate displaying softness along with other core borrower segments illustrating a range of doing business difficulties.
Asean’s Stretched Stimulus Stand
2011 November 9 by admin
Posted in: Asia
The Jakarta exchange veered again toward positive results as the inflation-confident central bank trimmed the benchmark rate 25 basis points while orchestrating simultaneous bond and currency defenses. In September foreigners who have been compelled to hold longer maturities abruptly slashed their one-third local debt share as the rupiah also dropped over 5 percent. International reserves that have doubled since the 2008 crisis to $115 billion were down $10 billion on dual exit and intervention, as the monetary authority took its ownership to 7 percent of government instruments outstanding. It kept 10-year yields constant until a 1 percent spike late in the month as domestic banks and funds too became uncertain over allocation under official support influence. A budget surplus account has as well been used for purchases, but dealers note that bid-offer spreads have widened on lackluster commercial appetite. Securities markets were likewise spooked by overseas repayment problems at the premier Bakrie family conglomerate which could force asset disposals including of valuable coal mines. GDP growth is due to top 6 percent this year, as inflation should stay within the 4. 5 percent mid-range target into 2012 on subsidy reduction suspension. In Malaysia, where the foreign-held bond portion is one quarter the total, the ringitt fell 10 percent from its post-peg high as domestic borrowing was hiked 50 percent for the fiscal year to cover the 5 percent of GDP deficit and increased social and infrastructure spending in advance of likely elections in 2012. Prime Minister Najib has already diluted an arbitrary detention law to win favor after street protests erupted and has offered direct cash transfers to low-income families to overcome economic slowdown. S&P criticized the lack of tax overhaul in the latest blueprint, especially introduction of a general goods and services levy to ease reliance on oil company profits. Sovereign wealth fund Khazanah will issue an inaugural yuan-denominated Islamic bond to underwrite power projects, after a previous attempt was scotched amid unsettled markets. Plantation concerns, which have been popular on the Kuala Lumpur bourse with the run-up in palm oil prices, may be further privatized to raise revenue.
In the Philippines, where remittances from the Gulf have receded, President Aquino unveiled a stimulus package basically advancing existing commitments within an overall deficit position as GDP growth sputtered to 3. 5 percent. Typhoon cleanup will add to costs and as consecutive storms arrived the administration failed to attract acceptable bond auction participation. Monsoon rains coincided with currency decline there and in Thailand, where a monthly current account gap was registered just after the Shinawatra clan regained office on an expensive rural giveaway plan.
Argentina’s Model Victory Stance
2011 November 4 by admin
Posted in: Latin America/Caribbean
Argentina’s bond and stock markets continued at the rear of benchmark indices as President Fernandez took a second term in a landslide and regained full parliamentary control, with triple the percentage vote of the runner-up. The outcome largely mirrored the earlier national primary after opposition parties had shown strongly in state races. A challenge from the son of former President Alfonsin faded as his party could not attract anti-incumbent allies and lacked a clear economic alternative vision and power of the purse to dispense largesse. During the campaign key unions got a 30 percent wage hike, above the privately-estimated inflation figure double the official 10 percent. A dozen consultants who have circulated the higher number face heavy fines under application of loosely-related consumer protection laws, with a handful under outright criminal indictment for “financial speculation. ” An attempt to devise an updated index with IMF technical help, based on prices outside Buenos Aires, has foundered on residual bad blood between the government and multilateral lender, which ended its adjustment program a decade ago prompting a record $100 billion external debt default. The cases are likely to be pressed harder with the overwhelming margin by the administration ticket which tapped former finance minister Boudou as vice-president. A crackdown on informal currency trading with the parallel market premium is also expected, as it undermines the central bank policy of gradual peso depreciation to aid exports and facilitates capital flight which is running at a $20 billion-plus annual clip outstripping the trade surplus.
International reserves are below $50 billion on the outflow and regular interventions, and another $5 billion is earmarked for commercial bond repayment in 2012 from the re-opened swap. Twice that amount is still owed to “holdouts” from the 2010 deal according to US Securities Commission filings, and Paris Club outstanding obligations come to $9 billion with negotiations on hold. With these lingering issues the Treasury Department in Washington has been ordered to vote against future development bank support for the country which has a large poverty profile that serves to justify energy and transport subsidies. While corporates have again tapped overseas markets, a sovereign return, although hinted at for infrastructure projects, will be difficult as funds seek “attachment” relief for state assets in US and European courts to honor untendered bonds. In New York a judge has regularly sided with plaintiffs and bemoaned official behavior, while the BIS in Switzerland has itself been subpoenaed to explain its possession of Argentine reserves. GDP growth will be lower at 5 percent next year, and Chinese trade and investment interest which has been hyped as a regional and western substitute may also languish as the tired Kirchner-Fernandez model enters its second decade.
Central Asia’s Great Game Grimaces
2011 November 4 by admin
Posted in: General Emerging Markets
The IMF issued a mixed forecast for the Central Asia-Caucuses region as Kyrgyzstan held its first contested presidential polls since the 2010 ouster of post-independence leader Bakiyev, and Georgia after lengthy resistance from their previous border skirmish agreed to Russia’s WTO admission. The Kyrgyz race after two years of caretaker government reflected an ingrained north-south split along ethnic lines which had brought hundreds of deaths in violent clashes and calls for reconciliation from both Washington and Moscow with their military bases there. Under a new system parliament will check the chief executive’s power in a breakthrough designed both to relieve popular discontent and attract foreign aid suspended during the bloodshed. Economic policy priorities include a revised mining code and further official debt cancellation as overseas worker remittances struggle to support consumption and the balance of payments. As an oil and gas importer the Fund predicts 5 percent GDP growth next year will be undermined by high inflation and overdue fiscal retrenchment. Energy exporters in contrast, spearheaded by Kazakhstan, will see greater expansion but also danger of overheating with aggressive spending programs. The lender comments that the budget stance often serves to curtail double-digit unemployment, with the youth cohort in particular lacking prospects. According to a separate mission the Kazakh economy will be up 6. 5 percent in 2011 on international reserves, counting the sovereign wealth fund, approaching $75 billion. Inflation is above target at 9 percent despite imposition of price controls, but the banking sector remains fragile despite credit and deposit recovery. NPLs are near one-third of portfolios, and interest income has been accrued for bookkeeping purposes but not received.
Tax obstacles have been removed to write-offs and prudential rules now discourage foreign-currency lending but another round of resolution efforts with proper provisioning and valuation is “critical. ” Reserve requirements have recently been tightened, and more exchange rate flexibility is in order after the formal post-crisis corridor was modified. Fiscal policy should continue to be countercyclical, and more private sector dynamism and diversification could be emphasized to build on strides in Doing Business indicators, the IMF concludes.
The sovereign wealth arm run by President Nazarbaev’s brother-in-law has taken stakes in the biggest institutions and has alarmed foreign investors with requests for increased ownership of flagship hydrocarbon projects after joint venture terms were set. As it marks 20 years of independence with FDI over $100 billion, the harsh BTA international creditor haircuts may as well be revisited and reinforced on sluggish earnings and the inability to locate and seize assets stashed abroad by the former owner, who fell out with the president in a family quarrel amid the area’s sweeping arguments.
Pakistan’s Unwoven Trade Ties
2011 November 3 by admin
Posted in: Asia
Pakistan’s share index kept its year-to-date drop to single-digits as after 15 years of denying reciprocal treatment, travel and trade access will be granted to Indian companies and executives as the country embarks on companion bilateral openings with the EU, China and the Gulf Cooperation Council. Commerce between the two is under $3 billion, and the accord aims to soon double the sum. Talks resumed after suspension over the Mumbai terrorist killings by Pakistani radicals and follow signing of a “strategic partnership” with Afghanistan emphasizing economic and security cooperation. Lawmakers and think tanks in Washington have also proposed a free-trade agenda but meet opposition over possible textile export tariff cuts and exemptions. The industry is the biggest overseas earner and generates one-tenth of employment, but has suffered from the withdrawal of duty-free privileges abroad and chronic power shortages at home. The electricity mess has spawned riots and is a major contributor through subsidies and foregone revenue to the 6. 5 percent of GDP fiscal deficit. Growth is an anemic 3 percent while inflation is quadruple that figure, and with the IMF program still suspended the central bank recently slashed the benchmark rate 150 basis points. Public finances were further strained by another round of colossal flooding and the government is poised to print money to bridge gaps in advance of next year’s parliamentary elections. Plans for an external bond placement, lately mooted in sukuk form to Gulf and expatriate investors, have been indefinitely shelved as CDS spreads are in the upper ranks of the worldwide distressed list. To promote US appetite recommendations by a foreign assistance task force at the Center for Global Development called for regular dialogue with banks and portfolio managers, along with the expansion of political risk and venture capital offerings through OPIC, which is now run by a former JP Morgan Securities director.
Indian stocks in turn continue to be pummeled by interest rate increases to break inflation near 10 percent as the economy slows toward 7 percent on flagging industrial output. The budget deficit could be 5 percent of GDP after second-half borrowing requirements were raised one-third from the original target, while the current account shortfall will not be readily covered by low foreign direct and portfolio inflows. Banks have revealed poorer earnings as the savings rate ceiling has been liberalized after lengthy debate to sharpen competitive challenges. The rupee has drifted toward 50 with only occasional central bank intervention, accelerating the shift of leading conglomerates toward stronger currency locations. However the Ambani’s Reliance Communications has been caught up in the telecoms scandal, and family dynasties in the political realm are also in a transcendent stage as Sonia Gandhi may anoint her Congress Party offspring to lead its next generation.
Ukraine’s Jail Joust Jolt
2011 November 3 by admin
Posted in: Europe
Ukrainian debt was off 10 percent on the EMBI, joining the 40 percent stock market loss as a frontier index laggard, as opposition head Tymoshenko got a 7-year prison sentence for alleged power abuse during her stint as prime minister in a court decision and process roundly condemned by democracy watchers. She was specifically found guilty of striking an expensive illegal gas deal with Russia in 2009, and thousands of her supporters clashed with police when the verdict was announced. EU negotiators, in the final stages of setting a formal partnership with the country, had urged a compromise, but President Yanukovich insisted the judiciary alone would shape the outcome. The disconnect reminded investors of the lengthy non-compliance with IMF demands after receiving $3 billion of the $15 billion agreement, with energy prices again at the center of dispute along with fiscal and pension changes. External debt, approximately half corporate, remains onerous at $125 billion or 85 percent of GDP, and T-bill redemptions next year are also $4 billion to sustain local deficit spending. After a loan from Russia’s state-owned VTB and expectations the Fund relationship would resume a Eurobond was floated several months ago, but international reserves dropped 10 percent in September to revert to the end-2010 level on capital flight and efforts to defend the 8 to the dollar currency line. The sum comprises two-thirds of short-term foreign debt due, and CDS spreads widened toward 950 basis points on an imminent squeeze as the government admitted to just “months” of sufficient funding. The hyrvnia is forecast to dip again to the crisis 10 threshold on the political and diplomatic aggravation of economic and financial tensions, with Western unease likely to postpone the arrival of a fresh mission from Washington to get the multilateral arrangement on track.
Moscow, despite urging Ukraine to join its new Eurasian Union with Belarus and Kazakhstan, also criticized the proceeding insofar as it questioned sensitive gas sales, with Prime Minister Putin now running again for president using the phrase “counterproductive and dangerous. ” The ruble too is at risk after a 15 percent drop since August as capital outflows through Q3 reached $50 billion. Finance Minister Kudrin, who has served in the post for a decade, was dismissed after he expressed reservations about budget policy and unwillingness to continue another term, and the central bank spent $10 billion intervening to preserve the dollar-euro basket. After divulging his re-election intentions, Putin spoke to a global business forum with a commitment to “further fiscal discipline and liberalization of strategic industries. ” Foreign companies were wary and Russian ones, preoccupied with repaying overseas creditors $30 billion by December, have other pledges in mind.
FTA Passage’s Passing Glance
2011 October 28 by admin
Posted in: General Emerging Markets
After 5 years of stalemate the US Congress in one swoop approved pending free trade agreements with Korea, Colombia and Panama coinciding with a state visit to Washington by Korean President Lee, briefly moving financial markets which had long ago latched on to bigger economic issues. The Seoul accord had been originally scheduled for signing during its hosting of last fall’s G-20 meeting, but lingering loopholes over financial services, autos and agriculture were in dispute. Foreign banks have been sensitive to rigid labor practices, with Standard Chartered recently facing a high-profile walkout over proposed changes, while the Texas-based Lone Star Funds’ controversial takeover and subsequent sale of a major local lender has brought both diplomatic recriminations and criminal charges. Recently the Achilles heel of private sector reliance on short-term external debt was again on display as the won nosedived 10 percent in September on heavy debt and equity selling led by Europeans. Despite the re-imposition of withholding tax, foreign investors who have traditionally been active stock buyers have moved into bonds to the extent of taking almost one-fifth the total. International reserves have recovered from 2008’s contingency to surpass $300 billion, but the ratio of near-term obligations to the amount was 200 percent at mid-year, according to the central bank. European banks supply near 40 percent of funding to the sector, and stress-tests were ordered by the regulator to examine the effects of an overseas borrowing squeeze as the continent attempts to sort out its liquidity-solvency predicament. The inspections began just after tumbling housing prices forced a rescue of specialized saving banks that operate in jurisdictions across the country. In the capital anger over the property plunge has promoted the candidacy of an entrepreneur without political party affiliation as mayor. Industrial output and exports are also down as interest rates hold firm.
Colombia and Panama were both strong performers on the EMBI before the FTA endorsement, as the former was lifted by a return to sovereign investment-grade rating and President Santos’ push for new fiscal responsibility and mineral royalty laws. The peso has only declined slightly against the dollar and future intervention will be limited, the monetary authority has signaled. The 5 percent GDP growth forecast is intact and unemployment is below 15 percent, although killings and violence have again accompanied end-October local elections. Panama’s debt went to top quality last year and Canal, construction and tourism revenues are all humming to bring expected 7-8 percent output expansion. The treaty must be ratified by the legislature and offshore finance center status, which was formerly marred by money laundering accusations, could see a cleaner route ahead.
Brazil’s Determined Exchange Rate Dump
2011 October 28 by admin
Posted in: Latin America/Caribbean
As GDP growth stalled to 3 percent on poor retail numbers setting the stage for deeper interest rate cuts, Brazilian Finance Minister Mantega shifted the “currency war” to another front with a WTO request to authorize anti-dumping penalties against countries engaged in unfair competitive devaluation including through quantitative easing. The real fell back to 1. 8 to the dollar as the threat was tabled as the worst performing emerging market unit, with net debt and equity outflows extending their streak which began with stiffer overseas borrowing and derivatives curbs. In the US, trade unions have long advocated for such sanctions at the multilateral body as results have been unavailing from unilateral reprisal as embodied in Senate legislation imposing tariffs against identified “manipulators. ” China briefly allowed the yuan to surge a daily extreme in reaction to the bill as the Treasury Department again postponed its semi-annual report on sensitive exchange rate relationships. The delay came ahead of G-20 and APEC summits, and raised the ire of opponents to replenishing development bank funding calling for a harder line against chronic-deficit trade partners. Brazil itself although reliant on Chinese commodities demand runs an overall current account deficit which has been offset by steady FDI. The central bank, which has seen its reputation eroded from the monetary turnaround under exporter political antagonism, was not in a position to condemn other authorities’ interference as it embarked on a series of spot and swap defenses. The situation may have parallels with 2008, with some companies experiencing dollar-denominated distressed debt spreads, and longer-tenor local instruments foreign-held in a greater proportion than the 12 percent aggregate vulnerable to selloffs which may not re-engage with enduring inflow taxes. In Mexico, in contrast, international participation absorbing 40 percent of term paper stayed relatively firm, despite the peso off 10 percent and Cemex’s corporate offering spiking to a 20 percent yield as it also reportedly breached covenants. Inflation hovers around the 3 percent target and will not noticeably worsen with depreciation according to the central bank, as it pledged to avoid intervention and capital restrictions with the ability to tap a $50 billion IMF contingency line.
Poland is as well equipped with this capacity as it was forced into rare zloty support prior to elections which saw a handy second term victory by the ruling coalition, sparking a rally. International investors’ 30 percent ownership of local bonds exceeds private pension funds where the state has pared its contribution to observe the 55 percent of GDP constitutional debt limit. Prime Minister Tusk declared reinvigoration of his party’s original fiscal reform drive as he too petitioned for relief.
Dubai’s Diluted Safe Haven Potion
2011 October 28 by admin
Posted in: MENA
UAE shares rallied toward the plus column as trade, tourism and banking deposits were diverted from elsewhere in the region to lift non-oil GDP growth to 4 percent despite continued Dubai debt wariness. Federal support is expected as a backstop even as an initial restructuring facility expires, with the budget break-even price for petroleum exports at $80/barrel. However Eurozone lending to the GCC, which has been cautious since the 2009 repayment moratorium, has shown further signs of caution on big infrastructure projects with French banks in particular less active in Qatar and Saudi Arabia energy ventures and requesting further collateral as overall Mideast quarterly cross-border credit totals dip below $10 billion. A refinancing for DP World’s port unit commanded a margin at double the previous arrangement, while the emirates’ sovereign wealth fund also saw the cost of a $3 billion package rise to 350 basis points over Libor. Bond yields on the HSBC-Nasdaq benchmark index jumped to 5. 5 percent in October. The national airline has turned to local rather than foreign banks and Chinese official providers have also entered the mix. The NPL ratio will increase to 3 percent next year, according to leading local institutions including Emirates NBD, which recently took over the bad assets of rescued Dubai Bank after its own chief executive was replaced in a ruling family shakeup. Government spending cannot serve to stoke domestic demand and pre-empt popular disquiet as in the Saudi and Qatari cases, where salaries and subsidies have climbed sharply. The two are also the main sources of $10 billion in medium-term assistance to Bahrain and Oman as they struggle to overcome political and economic regime challenges. Oil producers in the MENA area generally, including Algeria, Iraq and Kuwait, have boosted outlays approximately 7. 5 percent of GDP since the troubles and the fiscal scope may narrow next year as commodity revenues taper and foreign asset holdings in the developed world show shrinking returns.
OPEC policy is further complicated in 2012 by Iran’s presidency, with its oil minister the former head of the commercial arm of the Revolutionary Guards which controls top companies on the stock exchange. Capitalization has doubled to $120 billion over the past year as a string of state enterprise sales sustains an upward trend despite diplomatic squabbles over the alleged nuclear bomb program and terrorist backing. Over the counter and online trading alternatives are available, and despite a scandal in the sector which has implicated the President’s allies, another bank IPO recently took place to enthusiastic retail and institutional subscription, although the line between state and private control has essentially vanished in the internal war for deposits and power.
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Frontier Africa’s Wilderness Trek Trails
2011 October 21 by admin
Posted in: Africa
Sub-Saharan markets continued their drag on the MSCI Frontier Index with Kenya off 40 percent in dollar terms at the bottom of the pile as officials sought emergency IMF credit to stem a shilling shellacking past 100 to the dollar as the central bank resorted to a 400 basis point rate rise to 14 percent to counter double-digit inflation. The authority had resisted drastic moves since early in the year, insisting that monetary policy could not address embedded steep food and fuel costs and was widely criticized for interbank intervention moves instead aimed at punishing “speculators. ” T-bill rates have tripled since 2010 knocking the wind out of equities with slumping volume and the lowest valuations in a decade. Plans for a maiden external sovereign bond have again been shelved as the government turns to tax-free infrastructure instruments to plug budget gaps, the latest aimed at individual diaspora investors. Attention has shifted to upcoming elections that hope to avoid a repeat of the last race’s controversy and carnage, with several cabinet members after lengthy investigations facing human rights indictments from the Hague tribunal. GDP growth will roughly match the annual population jump at 3 percent as rural drought has brought large internal displacement alongside the cross-border influx in war-torn Somalia and new movements from Uganda and Malawi following political unrest there. Protests have erupted in both places against authoritarian incumbents at the same time prices for respective commodity mainstays like coffee and tobacco have softened. Uganda’s longtime leader Museveni has been buoyed by the discovery of oil, but opponents draw a contrast between his decades-long tenure and the peaceful presidential rotation in Ghana which has recently joined the petroleum export ranks. The Accra exchange is flat on world beating GDP growth estimated in the 15 percent range despite a fiscal deficit of 5 percent and mounting arrears that must be cleared under IMF program conditions. The benchmark rate has stayed above 12 percent and the currency is supported by firm cocoa and gold values, but international debt has returned to pre-HIPC levels with $3 billion in Chinese project borrowing.
Zambia, although not in any collective mainstream index, has been the regional frontrunner with a 15 percent gain as anti-Chinese populist Sata takes the helm with the expectation of a greater copper-revenue split. In the presidential contest before, Beijing had expressed a preference for the ruling party standard-bearer but this time it kept a diplomatic distance. Sata as a candidate railed against low-cost imports and local worker treatment, but in victory insisted on welcoming China’s aid and investment. He then proceeded to dismiss the long-serving central bank chief who has clamped down on non-residents’ T-bill access with higher taxes and loan restrictions. Their ownership stake is 5 percent versus a majority portion in the past as old African champions look to reassert control.
Export Powerhouses’ Dented Debt Delivery
2011 October 21 by admin
Posted in: IFIs
The IMF’s September Global Financial Stability Review in a somber tone specifically cited the onset of increased emerging market risk since 2008 as an overlooked contributor, with the “export” of credit risk to global investors with Chinese property companies an important element. It noted that as portfolio and bank-related versions again dominate capital inflows in most regions, volatility and outright flight could again ensue and that corporate external debt in the “search for yield” could be ripe for mispricing and deficient due diligence. Issuance in the asset class at over $150 billion already will hit another record this year, with cross-over demand from US high-yield a major impetus, particularly for neighboring Latin American allocation. Speculative participation is near one-third the total, and accounting and fraud scandals as in Sino Forest’s default could be looming. In China’s case companies have also gone offshore not only to tap cheaper funding with the assumption of yuan appreciation but to escape tighter domestic prudential regulation through administrative and monetary policies. Rapid loan growth there and elsewhere like Brazil and Turkey, especially to households, may invite danger based on recent historical experience, and stress test models point to rising NPLs. Asia could see the greatest spike followed by EMEA, which has so far borne the brunt of the Eurozone crisis, but Latin America will not be spared although its comparatively harsher blow could come from falling commodity prices in a terms-of-trade shock. Bank capital adequacy may be insufficient to absorb these swings, and economic conditions may be less favorable to immediate redress than during the post-Lehman period. The accompanying World Economic Outlook publication has cut developing countries’ GDP growth outlook, and structural fiscal deficits remain large amid climbing inflation and leverage and often “stretched” securities market valuations. Capital controls that have proliferated as an anti-overheating and exchange rate management tool may be “of limited use” in the current risk-averse and pressing financial institution oversight environment, the authors recommend, with “time running out” to properly mobilize political will and policy priorities.
A separate chapter in the document probes hundreds of long-term institutional investors about their post-crisis lessons and preferences, and underscores an emphasis on sovereign credit quality and instrument liquidity and “back to basics” derivatives approach for straightforward hedging. An “ongoing” trend toward emerging market diversification has resumed with equity ahead of debt, but with discrimination rather than a homogeneous segment view. A complementary focus in the alternatives category is commodities and infrastructure, although the ability to exit in all these areas is a lingering impediment that could be further spotlighted with the launch of the latest round of stricter insurance and pension fund guidelines for Europe’s single market as monetary integration otherwise may slacken.
South Africa’s Dangling Discipline Dodges
2011 October 14 by admin
Posted in: Africa
South African shares doubled yearly losses to 25 percent on slumping growth and fiscal signals and the “trial” of firebrand ANC youth leader Malema, who faces punishment for inflammatory race and nationalization rhetoric as President Zuma struggles to define his party and business community positions. His diplomacy has also come under fire as advocacy at the African Union for continental solutions sided with the status quo Qaddafi regime including refusing access to confiscated funds before the rebels took key centers. His call for a cease-fire and “inclusive” government was overtaken by events and challenged national liberation credentials at the same time militant labor and political flanks are promoting massive job creation and wealth redistribution schemes. However mining and manufacturing stagnation aggravated by strikes has pulled GDP growth below 3 percent as inflation and the budget deficit touch 5 percent. The central bank has been on hold with the repo rate at 5. 5 percent as foreign bond-buying halves from last year’s pace with net outflows for equities. The rand has fallen back to 8 to the dollar on ambivalent support and the European crisis connection, and the sovereign BBB+ rating could be undermined by new calculations of near-term public debt reaching 45 percent of output with another 20 percent in quasi-sovereign obligations, mainly from electricity company borrowing. FDI was a meager $1. 5 billion in 2010 and the collective bargaining pact for the textile industry which dropped thousands of jobs this year will set a tone for union relations and competitiveness that could seal the fate of multiple sectors that have already relocated elsewhere in Africa and other regions
Big Sub-Sahara destination Nigeria had been down 20 percent through September as more banks were taken over and the central bank continued to hike rates to keep inflation under 10 percent and preserve a narrow naira-dollar bond around 150 for exchange rate stability. A parallel market premium has resurfaced despite reserve rebuilding to $35 billion which noticeably lags the oil revenue surge. Governors are fighting the replacement of the excess crude account that had been emptied prior to elections with a formal sovereign wealth fund, and argue they are further burdened with a recent minimum wage increase that could send the eventual fiscal gap to 4 percent of GDP, excluding a request from the asset management agency AMCON for additional bad loan resolution resources. President Jonathan, upon winning office in his own right, has assembled a so-called economic dream team at the ministries of Finance, Trade and Petroleum to advance reforms, but the Nigerian World Bank Vice President for Africa regularly refers to the nightmare of “vested interests” against their vision.
Capital Flows’ Capped Wellspring Whirl
2011 October 14 by admin
Posted in: Fund Flows
The IIF’s September Capital Flows survey kept the 2011 total for 30 emerging markets roughly constant at $1. 05 trillion while reshuffling the portfolio debt-equity mix in favor of the former, given the push from interest rates on industrial country instruments “cut to the bone. ” The 2012 prediction is for the same amount, although with another year of 6 percent-range economic growth the portion will decline relative to GDP to 4 percent. FDI will be almost half the sum at $450 billion, overwhelmingly going to China, whose direct investment outflows at $100 billion also reflect the net creditor status of a large swathe of the tracked universe. In contrast, the MENA and Europe regions have been further downgraded, with the latter hit in particular by stock and bond sputtering in Turkey over its record current account deficit and credit expansion. A secular trend toward greater exposure should not be halted by recent selloffs as sovereign re-ratings will continue to elevate developing relative to developed credits, according to the report. In addition to traditional risk metrics, the emerging world no longer seems as historically prone to crises, while the institutional quality in advanced counterparts cannot be automatically presumed as evidenced by the Eurozone rescue and US budget ceiling debates.
In Asia share allocation will slip from 2010’s $120 billion to $70 billion, but private debt components, equally bank and non-bank, will come to $250 billion. India is alone in running a current account deficit while Indonesia’s FDI has quadrupled since 2009. In Europe Swiss-franc borrowing vulnerability is an obstacle in Hungary, Poland and Romania, and Ukraine remains out of compliance with its IMF program and Russia’s election calendar injects unease even with Putin’s intention to reclaim the presidency. Latin America’s overall “resilience” with net private inflows over $250 billion will be tested by Brazil’s continued capital control use, Mexico’s trade and remittance ties to the US and Argentina’s likely extension of the state intervention model into a second President Fernandez term with worsening external accounts and capital flight already features. Monetary policy in the region could switch toward cuts particularly if commodity prices weaken, which is also a danger for Persian Gulf destinations and South Africa. High oil and metals revenue are needed to sustain infrastructure and social spending, and nonresident bond purchases of $4 billion through the first half serve to offset the perennial balance of payments gap despite their consequences for rand volatility.
In a companion annual update on its stable capital flow and debt negotiation principles the group hails the top information dissemination and investor relations scores of Latin American and other issuers and examines restructuring cases in Greece, Dubai, Iceland and Cote d’Ivoire. In Greece the assessment may be complicated by its own role in offering a reduction menu to European authorities to meet desired private sector involvement. The package calculates the principal and interest haircut at 21 percent in a deeper concession than original French and German bank-backed proposals, and while self-congratulations are in order for following the “good faith” guidelines the episode may be far more involved in terms of potential conflict and Eurozone repercussions.
Egypt’s Deauville Declaration Muttering
2011 October 5 by admin
Posted in: MENA
Egyptian stocks budged from their rear MSCI roster position as international and Arab official lenders reaffirmed a previous commitment in Deauville, France for $30-40 billion in near-term aid for MENA political and economic transition, and formally recognized the Libyan interim authority which just before held its own reconstruction meeting. Cairo’s army-controlled government, which has faced renewed street protests as it prepares to stage parliamentary and presidential elections, originally spurned IMF budget and balance of payments funding with minimal conditionality for Gulf cash but has received only $500 million, according to officials, as domestic debt yields have touched the sensitive 13 percent mark in several failed auctions. GDP will contract at least 3 percent this fiscal year and unemployment is at a 5-year high although the tourism slump was only 30 percent in the latest month. Investment was down 25 percent in the most recent quarter, despite a decision by Scandinavia’s Electrolux to carry through with a Mubarak-era deal to acquire a stake in a big listed group. Local retail investors are the dominant bourse presence with lackluster company earnings and thin trading, with circuit breakers prevailing on periodic 10 percent daily declines. Big foreign holdings of both debt and equity have reversed to paltry amounts amid concerns about private sector direction and former regime ally investigations, and a budget deficit due to top 10 percent of GDP on the heavy social subsidy burden and a civil service salary hike. Double-digit inflation has eased with commodity retrenchment, and the current account will again be in shortfall despite foreign reserve depletion having stabilized at $500 million monthly. Banks are the main Treasury-bill buyers and the system has been under negative credit rating review notwithstanding a cautious 50 percent loan-deposit ratio. At the Deauville gathering in May the G-8 pledged $20 billion roughly equaling Arab lines, including $3 billion in Saudi ones which have only partially materialized.
Tunisia, where the stock market is also off has gotten World Bank and EU money, but a $25 billion 5-year plan presented by the Finance Minister, a former Citigroup executive, for infrastructure and job creation was not specifically endorsed. Elections have been delayed with the previously-banned Islamic party ahead in opinion polls, and GDP growth will be barely positive this year. With the troubled Eurozone as its chief trading partner, the current account gap will reach 5 percent of output even with the gradual return of remittances and visits from Libya. External debt is primarily on concessional terms, but additional Eurobond redemption comes in 2012, and the sovereign rating was downgraded in July with a negative outlook on a “cloud of uncertainties” which may also derive from summit puffery.
China’s Spirited Local Aloha Gestures
2011 October 5 by admin
Posted in: Asia
Chinese stocks and bonds sustained their slump as the national auditor, which had found RMB 11 trillion in authorized local government loans outstanding, reported detailed debt-GDP ratios in Hawaii resort-like Hainan and other provinces ranging from 50-70 percent. In northeast Liaoining the office revealed that 85 percent of funding platforms missed payments last year. A small portion through separate commercial structures issued bonds even with official bans on municipal engagement, and creditors have complained of asset diversion and forcible restructuring on problem projects. Banking stocks have been battered on the mutually-reinforcing combination of property and provincial exposure, although the regulator has blurred the classification standard in setting the respective totals within the overall NPL number under 5 percent. The low-cost housing campaign announced in the latest economic plan could aggravate potential danger according to the major rating agencies, with Fitch warning of an outright downgrade after shifting the local currency outlook to negative and Moody’s estimating that the amount at risk could be 30 percent higher than Beijing’s prevailing tally. While investors have shunned the big four giants, privately-run commercial and dedicated regional institutions could be facing the greatest risks. The fear contributed to a lack of foreign buyers for Bank of America’s original stake in CCB, and also may have facilitated Canada-based Scotiabank’s 20 percent acquisition of Guangzhou Bank. Trusts, which had been modernized after prominent collapses during the 1990s Asian crisis, have also been an intermediation tool and many listed companies are believed to have direct local debt commitments through financing arms. Chinese bank P/E measures lag BRIC counterparts, and with inflation stuck at 6 percent monetary tightening in new forms should undermine profitability, with reserve requirement breakdowns recently stiffened.
External borrowing access which was previously seen as a backup channel to lift capital minimums above the Basle III threshold has been curtailed at the same time as high-yield real estate developers and fraudulent firms like Sino Forest head toward default. Corporate governance abuse allegations have resulted in a bevy of US SEC and mainland investigations of so-called “reverse mergers” which have been backed by specialist investment banks and auditors as mainstream allocation alternatives. In Sino Forest’s case, prosecutors in Ontario, which was the listing domicile outside New York, have led the crackdown as bonds fell to 30 cents on the dollar in advance of the inability to honor over $1 billion owed. GDP growth despite solid retail sales and fixed-investment components is now put at 7-7. 5 percent, as the sovereign wealth fund with key export destinations in mind is considering emergency purchase of European peripheral debt as core domestic parallels loom.
Commodities’ Speculative Froth Skimming
2011 October 5 by admin
Posted in: IFIs
In response to France’s call as current G-20 chair for insight and recommendations on the overlap between commodity and financial markets and in particular the impact on price volatility and food security several task forces have reported back with proposed measures. Since 2008 the GSCI Index aggregating energy, agriculture and metals has doubled and assets under management through ETFs and dedicated funds and accounts have reached almost half a trillion dollars. By volume gold listings are the top exchange-traded products and in the US the CFTC regulator had concluded after oil investment investigations that stricter position limits could be needed affecting both industry and portfolio players. Developing and industrial country officials have met twice on the subject and asked groups like the IIF and IOSCO to weigh in on aspects from better data and information to anti-speculative and stabilization mechanisms. The securities supervisors have endorsed greater transparency and access and margin controls in principle without stipulating specific steps. The bankers’ trade association has spurned allocation restrictions while citing overwhelming evidence that swings results from underlying physical imbalances and that “long” index tendencies offset the short price-fall hedges of end-users. The World Bank agreed in a June report that the empirical case for defining and dampening so-called commodity “financialization” was weak and that exchange practice in Chicago and elsewhere for spot and futures activity also introduces distortions. Increased correlation between asset classes throughout the past five year crisis period has heightened correction severity generally. Emerging economies led by China have become leading raw material consumers, and food availability has been impaired by poor harvests and distribution channels as well as competing demand for grain-based fuel. Export bans in Asia and Europe have also hindered supply, while “resource nationalism” changing mining rules for foreign producers has affected metal values.
Developing countries acting through UNCTAD have nonetheless insisted on stricter financial intermediary oversight and an outright ban on proprietary dealing in the commodities space and urged reconsideration of 1980s vintage global price-stabilization arrangements which unwound at the time of the debt crisis which then almost sank major banks. The UK and EU are reviewing their approaches with the MiFID guidelines on cross-border investment likely to incorporate specialist adjustments for derivatives exposure and reporting. The World Bank’s IFC arm has meanwhile sponsored an agricultural risk management instrument that will allow up to $4 billion in farmer hedging, following President Zoellick’s prompt to “better use and not block markets. ” As with the Basle III capital and liquidity standards the IIF has warned of higher costs and “unintended consequences” from new rules that may match commodities’ sudden sweep.
Brazil’s Surreal Salvation Script
2011 September 22 by admin
Posted in: Latin America/Caribbean
Brazil’s currency and capital markets careened as the central bank after official and exporter hectoring abruptly slashed the benchmark interest rate 50 basis points and raised the inflation forecast to 5 percent as GDP growth expectations were pared to the 4 percent range, despite upbeat labor and retail indicators. The Rousseff Administration had already been criticized for a stream of cabinet departures which has conveyed endless reshuffling and seeming contradictions between commitments to restore a 4 percent of GDP primary fiscal surplus and launch new industrial policy measures including trade restrictions and targeted credit to help designated sector competitiveness. Governor Tombini couched the turnaround in terms of a revised policy methodology according greater weight to the deteriorating global economic outlook, but many investors who have pared debt and equity positions following the Finance Minister’s serial imposition of taxes fretted that the government’s short-term popular overtures had again held sway, and that the monetary authority had relinquished a longstanding autonomous and liberal reputation. They note that full currency convertibility has disappeared from the agenda and that the body was silent on a proposal to gather other BRIC members in a European-bond buying operation when the domestic debt level is still steep and even the most conservative foreign players, the Japanese investment trusts, are reducing exposure. Banks, in particular, have been shunned on the exchange as NPLs creep over 5 percent with many listings off 25 percent as macro-prudential limits on credit card issuance go into effect with repayment burdens eroding household spending power. In the space, BTG Pactual however generated excitement with a plan to go public and expand cross-border through tie-ups with Chilean and Colombian brokers. Skeptics fired back that numerous IPOs have been withdrawn in recent months and that the move outside Brazil could also be to escape worsening asset management and underwriting foundations.
Neighboring Argentina has frowned on the possible real-weakening impact and Mexico has also hinted it could cut rates as both countries head into their own presidential election cycles. In a national primary Argentine incumbent Fernandez took a commanding 50 percent after earlier provincial setbacks, paving the way for a cinched second term despite relentless capital flight and inflation. With pre-poll budget outlays increased 30 percent, tariffs have just been raised against Brazilian goods to win voter support. Mexican Finance Minister Cordero has quit to seek his party’s nod although the once dominant PRI is set to return to power, according to current opinion readings. In the 2012 fiscal blueprint just submitted no major tax reforms are contemplated even as the US-linked security and export design remains sketchy.
Turkey Flotilla Flotsam Formation
2011 September 22 by admin
Posted in: Europe, MENA
Turkish shares continued as emerging Europe’s worst as the Finance Minister characterized the 10 percent of GDP current account deficit with the lira’s 20 percent slump as “yesterday’s problem,” and geopolitical anxiety spread with ruptured Israeli ties over past treatment of a seized Palestinian aid ship. Erratic central bank policy has been rattling investors as an innovative mix strives to slow credit growth and discourage high-yield debt inflows, while preserving domestic demand and balance of payments coverage with the surrounding Eurozone debacle. Consumer loan growth has been just over 1 percent monthly pointing to success, but Q2 GDP was up again at a torrid 10 percent pace and repatriation of Turkish capital from abroad has supplemented decreased foreign allocation. A dollar intervention fund had been suspended but was recently reactivated not to curb appreciation but to support levels officials argue are 10 percent undervalued. President Erdogan after comfortable re-election has injected his administration heartily into Mideast tumult with criticism of Syria’s repression and praise for Libya’s Qaddafi ouster in addition to the dispute with Tel Aviv, which has hurt the exchange there alongside a domestic protest movement over housing costs and international controversy over a UN bid for Palestinian Authority statehood. The Israeli economy has softened to a 3 percent growth clip and the shekel has slid as a round of rate cuts is previewed. The heavy export reliance on high-tech and defense goods could suffer under global cutbacks, and at home the Netanyahu team is under pressure to break-up family conglomerates which dominate business and finance.
Relations have also frayed with Arab neighbors in transition, including Egypt now under military rule, where Sinai border attacks have been mounted, and Jordan and Lebanon with their own fragile governments. King Abdullah has introduced constitutional changes to give parliament more power, but has turned to $10 billion in Gulf aid to plug a runaway budget gap. Lebanon’s triple-digit sovereign debt load depends on bank placement, and deposits have flat-lined with GDP growth at only 1. 5 percent and the Syrian spillover. The Hezbollah faction in the coalition has refused to hand over accused killers of former Prime Minister Hariri named in a years-long international investigation. Iran’s role in the area hangs over the interplay with the US army also due to exit Iraq by year-end where a new hydrocarbons law was just endorsed after 5 years of negotiations. Production has reached almost 2.
