No More Learning

The state oil and gas company recently got a $5 billion injection from the sovereign wealth fund to service debt as usable foreign reserves may be only a fraction of the $90 billion reported. The budget has swung to deficit on stimulus spending, and energy operators are demanding lower taxes given global prices. Inflation spiked to 15 percent with the exchange rate float coinciding with a new central bank head in a bid for confidence ahead of a “winter chill,” in the President’s words. While in the UK he signed dozens of deals worth almost $10 billion, and presented a dizzying range of transport and technology infrastructure projects striving to avoid the dashed fate of previous special economic zones. An offshore financial center modeled on Dubai is also in the works where the local stock exchange may move using facilities to be built for the upcoming Expo 2020. While the EU is the main oil export market, China is the biggest commodity partner overall and continued weakness there could extend GDP contraction. The tenge has slipped below 300/dollar with occasional intervention and may have a further 10 percent to fall to also realign with the stronger ruble. The peg departure was a shock but obviated the direction taken by next-door Kyrgyzstan where foreign currency sales are now banned due to som pressure. The banking system, still suffering a hangover from the 2008-09 crisis, may experience additional trouble as interest rates were hiked to 15 percent and next year’s budget pares government direct small business lending. The sovereign rating may soon be relegated to junk by at least one agency, which could accelerate plans to develop Islamic sukuk bond alternatives.

Ukraine stocks were down around the same as MSCI laggards but bonds have soared an equal 40 percent on the successful restructuring under the IMF program, which removed credit rating default status. However the $3 billion owed to Russia from the ousted predecessor regime has not been resolved, although President Putin suggested stretching repayment as a compromise still for the full amount. His Finance Minister warned of court resort should December obligations not be met, which could violate the Fund’s lending into arrears policy absent a determination they are commercial not official or can be renegotiated under another rationale. Corporate restructurings have also reached impasse in cases like Metinvest and Ferrexpo, and despite a GDP growth return in the last quarter and EU free trade onset in January agriculture and metals are slumping globally. Bank late and bad loans are at 20 percent of the total and the currency is due to slip toward 30/dollar keeping inflation around 25 percent. Output collapse will near 10 percent this year, and ruling coalition setbacks in parliamentary elections have stalled fiscal reforms with another harsh winter looming.

Hungary’s Exaggerated Exchange Wizardry
2015 December 7 by admin

Posted in: Europe
Hungary’s stock market was the region’s runaway winner into the last month of the year up 30 percent on the MSCI Index, triple Russia’s gain as the core universe’s other positive performer. The equity march came despite a 5 percent stake sale in leading bank OTP at a discount as the exchange itself was repurchased from Austrian control at $45 million for 70 percent back to “return as national property,” according to the central bank. Budapest Bank had reverted from private hands earlier this year, and airline Wizz Air embarrassed officials around the same time when it chose to list in London instead of at home. Capitalization is under 20 percent of GDP, and private pension fund elimination in 2011 has thwarted activity for small companies in particular the government targets under its Growth Support lending scheme which is to expand another 5-10 percent in 2016. However economic expansion may be just over 2 percent then with reduced EU fund receipt and farm production, and German manufacturing spillover with the VW crisis and China export slump. The budget deficit should stay under the 3 percent EU sanctions threshold despite an agreed cut in the special bank tax. Interest rates could be lowered further as the euro undergoes another QE round and inflation settles around 2 percent.

Polish shares veered toward the opposite direction with a 25 percent MSCI loss after the populist Law and Justice Party won a majority in parliamentary elections on a platform to enact its own banking tax and raise social benefits while keeping within the 60 percent of GDP constitutional debt limit. On foreign policy its tough stance against Mideast refugees is in contrast with the position promoted by former Prime Minister Tusk in Brussels. An experienced bank executive was tapped as Finance Minister, and the new administration will have a chance to replace almost the entire monetary policy board as terms expire in the coming months. They will likely ease another 50 basis points with a slow exit from deflation, with domestic-demand led growth again set for 3 percent in 2016. Eurozone recovery could boost exports but the current account may slip to deficit on consumer and capital goods import appetite. Privatization of state enterprises will go on hold and they are to raise budget dividends, according to the party’s campaign plans. The Warsaw exchange will remain a strategic holding, and alliances with neighbors are unlikely as initiatives toward potential Belarus and Ukraine entrants may be scuttled.

The Czech Republic’s share decline was almost as bad at 20 percent despite superior 4. 5 percent GDP growth from private consumption unlikely to last into 2016. EU spending that came to euro 6. 5 billion through September will taper and inflation may pick up toward the 2 percent goal on wage inflation and less output slack. The 27 koruna exchange rate limit will stay in place for another year but the central bank has left 2017 exit open. Its balance sheet has increased to 35 percent of GDP on regular interventions, but exposure is under half the Swiss corresponding sum when its cap was abandoned with the magic formula no longer entrancing investors.

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Private Equity’s Public Market Pummel
2015 December 1 by admin

Posted in: General Emerging Markets
A new paper commissioned by the Dubai-based Abraaj Group and written by Harvard Business School professors cites long-term performance and diversification advantages of private over public equity in 25 “global growth” markets across all developing regions, and urges they be complementary allocations in a balanced institutional portfolio in contrast with consultants’ frequent either-or approach. In 2014 less than one-tenth of private capital inflow came through stock exchanges and the ratio to FDI is under 0. 2/1, the research comments. For the markets under review the allocation as a portion of GDP is just 40 percent on average, but their size still swamps private equity where the highest penetrations are 0. 2 percent. Recent World Bank figures show they were 30 percent of worldwide capitalization, half the economies’ corresponding share of output. They are illiquid and low-volume in comparison with developed markets, whose share turnover is double and typically dominated by a handful of big firms posing concentration risk. In Colombia, for example state oil giant Ecopetrol is one-quarter of exchange value, and the ten main listings are 80 percent of the total. Smaller firms are shut out and instead issue overseas, and venture capital-related IPOs are around 20 percent of global activity. Public debt markets too are typically closed with limited creditworthiness, and many industries like consumer goods and healthcare are excluded with banks the overwhelming weighting. According to corporate databases, the earnings in overlooked segments are often superior, and have contributed to triple PE over MSCI emerging market index 3-year returns at 12 percent and 4 percent, respectively. Over 10 years the Cambridge Associates’ reading for the former maintains a 3 percent lead. The paper points out that top-quartile managers exceed the benchmark and have staying power, and that results are uncorrelated with other asset classes while both public emerging and frontier market co-movement has increased. It concludes that the latter are “immature” and that to spot and cultivate good investments both tracks should be pursued, especially to find them outside traditional financial and capital-intensive areas.

Outside its Middle East-Africa base Abraaj named battered markets like Argentina and Ukraine in its growth universe, and celebrated macro-investor Soros just took PE stakes in real estate and telecoms ventures in the duo. Argentina’s stocks and bonds have rallied on the Macri presidential election victory despite the no-preference stance of third party candidate Massa, who broke from the ruling Peronistas and their standard-bearer Scioli. A televised debate did little to erode Macri’s post first round momentum, as a central bank police raid focused attention on the outgoing government’s strong-arm tactics and possible dismantling of capital controls, as officials there were investigated for questionable currency deals. Formal devaluation is widely expected as reserve conversion may be needed for a holdout settlement, and the trade surplus dwindles on flat agricultural exports. Ukraine sovereign bonds are up 40 percent after a successful restructuring restoring the “B-minus” rating and a positive GDP reading. Russia’s $3 billion deal in the twilight of Yakunovych’s rule was left out, and President Putin floated a payment delay compromise without the same creditor “haircut. ” The IMF must still determine if the relationship is official or commercial as it updates its lending-into-arrears policy to reconcile public and private interests.

Argentina’s Mooted Mainstream Macri-Fundamentals
2015 December 1 by admin

Posted in: Latin America/Caribbean
Argentina’s stocks and bonds extended double-digit rallies with opposition candidate Macri’s 51-49 percent win over President Fernandez’s chosen Peronist successor Scioli, as a tense Casa Rosada meeting on the transition hinted at the rough economic overhaul path ahead without his party’s legislative and governorship control. The incoming president’s team has already suggested a phased timetable for lifting exchange restrictions in contrast with the campaign’s immediate removal promise, and negotiation delays with holdout bond creditors as it untangles the past decade’s reserve position and payment record. In the near term agricultural export taxes may be suspended, Mercosur free trade relations restored with Brazil, and statistics reporting revised in line with IMF recommendations for more accurate growth, inflation and fiscal deficit figures. Currency devaluation is a precondition for exchange rate unification, but an outright float could decimate the central bank balance sheet as a new governor prepares to take charge amid allegations of illegal official dealing. It could also dent domestic consumption while barely supporting dollar-denominated commodity exports, with recession return likely on stubborn 20-percent plus inflation with the weaker peso pass-through. The budget gap will persist at 4 percent of GDP without further subsidy cuts on momentum from pre-election spending and the true public debt ratio remains unknown with hidden accounts but may exceed 50 percent. With these adjustments and more investor-friendly policies, the sovereign rating is due for an upgrade, which will facilitate external corporate access by state oil firm YPF and other names prior to sovereign re-entry.

In next-door Bolivia President Morales will hold a referendum soon on re-election after a decade in power, with hydrocarbon-driven growth sliding to 3. 5 percent and spawning unaccustomed fiscal and trade deficits. A $50 billion 5-year public investment program is designed to cushion the downturn, but is often tied to energy projects with scant private capital scope despite new commercial and arbitration laws to address the expropriation tendency. The gas pipeline to Brazil will wane without fresh finds by end-decade, and the central bank continues to lend to state enterprises as foreign reserves dipped below $15 billion. The currency has been stable at 6. 9 per dollar but may drift to 7. 5 particularly with depreciation of neighboring regional units. Although another sovereign bond is in the works, Chinese loans remain the preferred external route with another $7 billion pledge in October.

Ecuador’s President Correa announced he will not stand in the next 2017 contest, with the oil economy in recession and trying to plug a 3 percent of GDP budget hole. Next year’s plan predicts a $35/barrel price and spending retrenchment, with additional arrears accumulation to contractors, but excludes a $1 billion arbitration award to Occidental Petroleum. The 2015 external bond matures soon and the government intends another $1 billion issue, as investors are wary over the President’s unabated criticism of the dollar regime although he has backed away from electronic money as an alternative. Domestic banks have suffered deposit outflows in the same concern and may have to tap a $2. 5 billion liquidity fund. In Venezuela the opposition should triumph in December parliamentary polls despite President Maduro’s jailing of leaders. The economy is in near-depression and hyper-inflation despite the absence of official statistics, and state oil monopoly PDVSA is considering a bond swap for $10 billion owed in 2016-17 as all parties scramble for default position.

Anti-Money Laundering’s Poor Country Soak
2015 November 23 by admin

Posted in: General Emerging Markets
With Turkey’s G-20 summit due to review the financial regulatory agenda, including unchanged remittance costs despite the 5 percent medium-term goal and bank “de-risking” shunning low-income economies and relationships with money transfer networks, a Center for Global Development report suggests negative “unintended consequences” from anti-money laundering and terror funding rules. The IMF’s Financial Stability Board recently cited severed correspondent bank ties hurting trade credit and other lines may be due in part to compliance costs and heavy penalties associated with enforcement of the provisions through the 25-year old unrelated Financial Action Task Force, created at the height of the global drug wars and then strengthened in the post 9-11 era. Risk-based standards are harmonized in principle across developing and industrial countries, and violators are placed on “gray” or “black” lists depending on shortfalls. National authorities are supposed to coordinate information-sharing and supervision, but in practice lack of capacity and a proliferation of agencies involved can leave gaps or sow confusion, with the US alone counting some 40 government unit participants. International banks have fled the money transfer business to high-risk locations like Somalia in recent years, with the last US connection Merchants Bank of California stopping facilitation of $1. 5 billion in diaspora flows early this year. Relief groups and congressional representatives have petitioned the Treasury Department to relax regulations, and providers in Dubai and elsewhere have stepped in, but remittance size and expense has noticeably deteriorated there, according to the UN. Normal correspondent accounts have also been closed under new anti-secrecy interpretations that mandate “knowing your customer’s customer,” and not only firms, but non-profit organizations and vulnerable individuals cannot access needed cash and expertise, the report notes.

Basic data and research is lacking on the extent of the problem beyond indicative surveys as public and private sector bodies do not exchange details about applications and decisions. The FATF guidelines could be more simplified and transparent, and compliance could be easier with technological advances like biometric identification. The World Bank has just updated remittance work which shows costs largely flat although certain corridors have seen scarcity and spikes, and the International Chamber of Commerce last year pointed out that trade finance was under pressure, but not mainly due to global bank de-risking. The IIF’s latest emerging market sentiment survey underscored that this constraint was widespread, as the benchmark index dipped to a record low in the face of credit supply and demand setbacks. In China reported non-performing loans reached a high in the past quarter at over $600 billion in aggregate, as total social financing fell by half on a monthly basis.

The IMF in its G-20 summit preparation published an analysis of migration and refugee trends with a $435 billion developing world remittance total in 2014, over half of FDI and triple official aid. It cited a study of higher household contributions to education and health over average consumption, and increased financial intermediation in response often through dedicated diaspora channels. However the 8 percent average transaction charge remains steep and a 1 percent reduction could release $30 billion, greater than Africa’s annual bilateral donor budget. Expatriate savings could also be harnessed through special bonds for infrastructure and social projects, but the record has been mixed in Ethiopia, Nigeria and the Philippines where offshore money is unfamiliar with such recycling, the Fund comments.

Haiti’s Ineluctable Election Rumbles
2015 November 23 by admin

Posted in: Latin America/Caribbean
Haiti’s presidential elections went into a second round amid continued violent protests that also complicated parliamentary runoffs, as allegations mounted of widespread fraud and manipulation despite observers’ presence, especially since President Martelly’s chosen successor was in the lead. He has fought with political opponents and civil society activists throughout his tenure coinciding with the record earthquake and donor-funded recovery program, and was forced to name a prime minister from a rival party after several candidates were rejected. Before the political transition, the IMF agreed to a new $70 million extended credit facility, with the GDP growth forecast lowered to 1 percent after severe drought, and inflation headed to double-digits with the food price shock and exchange rate depreciation. The budget deficit objective of 2. 5 percent of GDP was in peril prior to the election cycle, with heavy state power company losses and declining aid from Venezuela’s Petrocaribe. The previous Fund line noted “disappointments” with structural and financial sector reform in particular, although it cited monetary policy progress. Per-capita income improvement since the 2010 temblor did not reduce poverty, and fiscal and current account gaps widened. External public debt below 9 percent of GDP with the earthquake writeoff had rebounded to 20 percent last year with Caracas’ concessional loans. The central bank has tried to limit currency devaluation to 3-4 percent annually, but the rate doubled in recent months with dollar hording over the poll period.

The World Bank’s “Doing Business” ranking is 177 out of 189 countries, and it is also at the bottom of competitiveness and corruption indices. Weak property rights and “predatory” commercial practices are binding constraints, according to the IMF’s recent Article IV report, and security, infrastructure, human capital and economic data foundations are lacking. Inflation is above trading partners, and the “crawling” peg currency regime may have to be revised with tapering assistance and remittance flows. Fuel taxes have not increased and VAT introduction is nascent with revenue/GDP below 15 percent, and a single Treasury account system is not yet in place. Bank effective reserve requirements over 30 percent are still hefty, and open market operations have just begun through bonds to include dollar-denominated issues. The foreign exchange market must be deepened, and banks are well-capitalized and profitable but credit in the absence of a functioning bureau is concentrated on aid-related customers as the rebuilding effort winds down. A Petrocaribe financing stop would cut 1 percent from output and authorities would have to draw on commercial bank deposits, further posing risk. The system must still also meet anti-money laundering and international accounting standards.

US investor curiosity has been diverted to Cuba with the mutual embassy opening and partial lifting of banking, travel and telecoms restrictions short of trade embargo elimination. Agricultural exporters believe they could quadruple sales with changes in the two-decade old Helms-Burton Act, and multinationals like Coca-Cola expropriated during the revolution have hinted at return. The Havana Trade Fair in November attracted North and South American, Asian and Russian interest and private equity firms such as London-based Redux have launched dedicated funds. However the closed-end Herzfeld Caribbean Basin offering is off 25 percent this year after early enthusiasm as island reconstruction difficulty there compounds.

Nigeria’s Copious Currency Complaints
2015 November 16 by admin

Posted in: Africa
Nigerian stocks sold off to extend a double-digit MSCI loss and the parallel naira market spiked as President Buhari tapped investment banker and currency control policy defender Adeosun as Finance Minister, while keeping the Oil Ministry portfolio himself. The appointment surprised investors after the central bank chief seemed to hint at more flexibility at a London conference, after imposing restrictions on another 40 import categories and ordering tax identification registry for all money dealer transactions. In the past year reserves have dropped one-quarter to help preserve the official 200/dollar rate, while Q2 GDP growth slid to 2. 5 percent. The continued intervention removed local currency bonds from both the JP Morgan and Barclays indices, and the US and EU both filed WTO complaints that foreign exchange restrictions were free trade violations. Multinational companies also warned about reneging on previous oil production-sharing contracts, which often date back decades, under comprehensive review by the President’s team. They were further startled by the hefty $5 billion fine imposed on South Africa-based telecom operator MTN for disconnecting users, although the public pension fund at home, its biggest shareholder, likewise criticized the practice and acquitted Nigerian authorities of overreach.

South African shares were off over 10 percent on the MSCI Index as officials backpedaled on a university fee rise in the face of student protests, with a 3 percent of GDP budget deficit predicted through the medium term as ratings agencies are poised for a sovereign “junk” downgrade with possible breach of the 50 percent public debt/output threshold. Finance Minister Nene lowered the economic growth forecast to 1. 5 percent this year, as mining strikes again shrank Q3 sector activity and the related PMI. The rand has tumbled toward 14/dollar with pass-through inflation climbing to 5 percent. The benchmark domestic bond yield reached 8. 5 percent, and CDS spreads 250 basis points, as the fiscal blueprint mainly looked to higher growth to break the credit deterioration cycle. Ruling party labor union activists have called on the central bank for rate cuts and currency support, and President Zuma has been sympathetic while not trampling on formal monetary policy independence. However that stance may change with the opposition Democratic Alliance gaining opinion backing throughout the country, and splinter groups within the ANC coalition threatening to leave altogether. The President’s waning political strength has allowed a trade dispute with the US to fester over poultry export eligibility under AGOA duty preferences, and sapped interest in post-Mugabe planning in next-door Zimbabwe amid a severe cash shortage. No successor has been designated to the 90-year old whose frailty was apparent after unknowingly repeating an old speech, with tax revenue, wages and prices all falling under internal devaluation. Chinese aid has pulled back, and the IMF and World Bank cannot resume lending without arrears settlement. To mollify remaining foreign investors, the indigenization law mandating 50 percent local control has been diluted in specific cases, but the MSCI frontier reading has declined 30 percent on the grim outlook.

Ghana has seen a similar setback despite rough observance of the IMF program and a World Bank guarantee for external bond rollover. Local 3-year bond yields are at 25 percent with the 5 percent of GDP fiscal gap through September and fears of additional cancelled auctions. Zambia after initial repudiation has invited the Fund back for talks, as the central bank hiked rates to 21 percent to protect the copper-dependent kwacha. Electricity shortages and poor demand have shuttered mining operations, and another sovereign bond pending IFI imprimatur would entail a spark of imagination.

The EBRD’s Lopsided Transition Tread
2015 November 16 by admin

Posted in: Europe
The EBRD’s 2015-16 transition report focuses on missing financial system features since the last detailed look a decade ago, and in particular on debt buildup and lackluster small business and private equity channels. Despite the end of the credit boom in 2008, the post-crisis debt/GDP ratio has risen 25 percent to almost 125 percent, above the global average for the period. The levels outside Cyprus and Greece jumped most in Ukraine, Mongolia, Armenia and Slovenia and the aggregate proportions are highest in Croatia and Hungary. Hard currency (euro, dollar and Swiss franc) corporate and household exposure is 50 percent compared with 30 percent in other emerging economies, and despite private sector deleveraging government obligations increased to support domestic demand and ailing banks. The investment/output ratio in turn has been stuck at 20 percent, with an estimated $75 billion in annual unmet needs. Non-performing loan loads at 15 percent throughout Southeast Europe and Kazakhstan remain a drag without bankruptcy procedure and distressed instrument remedies.

Of the individual debt categories, corporate growth is still available in a cross-section of countries including Estonia, Poland, Bosnia and Herzegovina and Georgia and could boost infrastructure in particular. In the initial post-communist decade this allocation came to 3. 5 percent of GDP, and governments have absorbed 60-70 percent of the cost, leaving ample room for FDI and capital markets to fill the gap, with public and private equity layers especially lacking. However small firms with less collateral and transparency will continue to be frozen out under tighter conditions and “cumbersome” application processes, according to EBRD surveys. Simplification is urgent in Albania and Tajikistan, and credit registries could otherwise be introduced without legal changes. Leasing, factoring and microfinance are developing as alternatives, but to make real inroads they require a “second phase” of regulatory and statutory revisions, the findings add.

From 2008-14 only 1 percent of global private equity or $20 billion went to the region, and three-quarters was in venture capital deals. The emerging market portion also halved from 20 percent pre-crisis, and in the main targets Poland, Russia and Turkey the activity is less than 0. 1 percent of GDP, with net returns around 15 percent. The EBRD has invested in 100 funds over its history, and retail, consumer goods and information technology have been the leading sectors. Buyout transactions have shown the biggest payouts but typically entail leverage no longer provided by mainstream banks as they cope with new risk-weighted capital and liquidity formulas. Potential portfolio companies have a $60 billion book value, and the number could triple to 2000 and create 40,000 jobs with the right policy help. In 2014 a comprehensive corporate governance analysis revealed major gaps in shareholder rights and board independence. Public equity markets can be an outlet, but only Poland, Romania and Turkey have “fledgling” small business tiers. Private pensions have also been rolled back in the region as a natural long-term investor base. Stock market development indicators put capitalization/GDP under 0. 1 percent for most of the top 15 countries, and diversification had faded with a 0. 8 correlation with Western Europe. The report concludes that economic growth will be flat this year and just 1. 5 percent in 2016, while the financial sector structural reform rankings across banking, insurance and securities are barely positive across the 35 members yet to rebalance the score.

Myanmar’s Pesky Post-Election Pause
2015 November 11 by admin

Posted in: Asia
Aung San Suu Kyi’s National League for Democracy party may have won a parliamentary majority with the military’s USDP conceding defeat, as she repeated her election triumph twenty-five years ago in an historic contest with honored results and fewer irregularities. However the jockeying to name the president as head of government has just begun and will last into early 2016, with the army’s automatic hold on one-quarter of legislative seats helping to shape the choice, and the ceasefire with fifteen rebel groups, excluding the Kachin and Shan independence armies, is also due to be finalized over that period. The packed political agenda omits issues like the rights of the minority Muslim Rohingya who were barred from voting, and human rights campaigners argue that Western trade sanctions should stay in place. Remaining restrictions will also be hard to relax with the generals’ dominance of the state oil and gas and other major companies, while the NLD’s campaign platform was also vague on future economic policy beyond “governance reform. ” Its leadership also lacks business experience, prompting foreign investors to delay action despite progress on new banking and commercial laws.

About $20 billion in foreign direct investment has come in the past four years, mainly in energy and telecoms, since President Thein Sein announced the transition. China, Hong Kong, Japan and Singapore have been the largest sources, with interest from US and European multinationals in the consumer goods and property sectors. A handful of private equity firms have opened with local and overseas capital, and nine international banks received licenses to operate in the Thilawa special economic zone outside Yangon. They await modernization of the stock exchange, which will see a few company listings in a preliminary phase following the model in next-door Cambodia and Laos. The garment industry is viewed as the biggest potential employer, drawing low-wage and low-skilled labor from agriculture, and retailers like Gap and H&M have contracted suppliers. However of the 50 million population, textiles absorb only one quarter of a million workers due in part to chronic land, power and transport shortages. The near bottom 177 ranking in the World Bank’s 2015 Doing Business report has often barred the country altogether from consideration.

The IMF’s September Article IV report cited “daunting challenges” as the region’s poorest economy with USD 1,200 per-capita income. Trade and financial liberalization and labor and infrastructure improvement have begun, but the new government’s chief task will be to bolster basic stability despite headline 8 percent GDP growth, it argued. Inflation, partly due to 20 percent currency depreciation against the dollar before election season, is also near double digits. The fiscal and current account deficits are at 3 percent and 6 percent of GDP, respectively. The central bank continues to finance the budget and foreign reserves are down to 3 months’ imports, a critical threshold. Private sector credit growth from a low base has been excessive at 35-50 percent annually, and natural gas earnings have declined with lower global prices. Fresh banking, commercial and investment laws have been prepared but still must be enacted and implemented, as financial sector supervisory capacity in particular is already strained, the Fund warned.

Exchange rate and monetary policies have been slow to correct despite large donor technical assistance programs, with the Asian Development Bank on the front lines. Pilot Treasury bill auctions have been launched, but interest rates have been capped and foreign bank branches banned from participation. The parallel and official currency markets have been partially unified, but import access has been limited. Bank lending is 90 percent short-term, under one year, with inadequate capital and liquidity, and state commercial and policy banks have multiplied without consolidation and reform, according to the IMF. The financial system, even with gradual sanctions removal, remains subject to international penalties for non-compliance with anti-money laundering rules. In the coming months the president’s top economic appointments could signal overdue banking and regulatory cleanups, and although Aung San Suu Kyi does not qualify constitutionally her clear embrace of business-friendly policies would replace luster to the Golden Land’s recently leaden investor transition.

Originally published on Asia Times 10 November 2015 www. atimes. com

The TPP’s Financial Services Finagle
2015 November 11 by admin

Posted in: General Emerging Markets
The agreed TPP text was released in November with an 80-page financial services chapter with standard provisions for national treatment, non-discrimination and market access, and prudential and monetary policy exceptions permitting rule suspension during crises and unstable periods. Cross-border trade between the dozen country signatories is authorized subject to registration, with confidential information to be protected and no senior management local majority ownership or operating requirements. Obligations can be phased in over time but current measures cannot become more restrictive. Insurance supply will be “expedited” under simpler regulation, and activities also include portfolio management and electronic payment. A dedicated dispute settlement mechanism is established for arbitration outside the general state-investor framework, and the US Trade Representative negotiated features to promote “level” competition with postal institutions selling the product range. The office notes that exports globally represent a $70 billion surplus, and that TPP partners account for one-quarter of total services trade and took $15 billion worth in 2013 as the agreement talks entered a final round. It adds that many members have suffered “serious” financial crises in recent decades since the last major multilateral financial services bargaining, and that the systemic contingency clauses can serve to preserve integrity and solvency.
As congress reviews the 30 chapters in the entire body, it will not have to change domestic law or practice to conform in this area, according to USTR.

Banking, securities, currency trading, leasing, consumer finance, and derivatives will be covered and insurance includes life, non-life and reinsurance. Service limits and quotas and mandatory joint ventures are prohibited, and new lines beyond existing local offerings must be considered. Regulatory transparency dictates that decisions are published in advance, with time to comment and prepare for the implementation date. Equal access will be provided to self-regulatory and professional associations and the clearing and payment networks. Back-office functions can be performed in-country or offshore without “arbitrary” direction and leading central bank and Finance Ministry officials will coordinate and troubleshoot approaches through a separate standing committee. They will have four months to consider complaints submitted for resolution before a specialist arbitration panel is appointed. Chapter annexes address investment funds, data processing and transfer, and credit and debit cards. Brunei, Chile, Mexico and Peru will fully adopt the arbitration procedure five years after the treaty enters into effect, and Singapore and Vietnam also point out in attachments technical complexities in domestic laws that may differ from TPP language without diluting commitments.

Exchange rate policy is outside the pact’s purview and the Treasury Department, which has never named members as “manipulators” in regular reports, has hailed an understanding to meet and consult periodically on its trade spillover without establishing a formal investigation and enforcement scheme. Labor and corporate opponents, including automaker Ford, seized on the latter’s absence and lawmakers although unable to amend the deal under Trade Promotion Authority may still demand renegotiation to include binding currency regime guidelines. Among the leading 2016 presidential contenders Democrat Clinton has come out against TPP she once called the “gold standard” without mentioning this debate, while Republican Trump labels China and Asian neighbors as clear violators deserving import freeze despite likely financial services chill in response.

Doing Business’ Dozen Year Dichotomy
2015 November 4 by admin

Posted in: General Emerging Markets
Low-income economies rose more in regulatory efficiency and quality rankings than advanced ones over the 12 years since the World Bank’s Doing Business publication was launched, according to the 2016 compilation just released. By region Europe and Central Asia led, followed by Sub-Sahara Africa and MENA, with the last stagnating since 2010 from Arab Spring tumult. By area enterprise startup saw the greatest reforms, while credit access came in second and was typically realized with major legal and infrastructure overhaul. Contract enforcement was the laggard as it involves the “complicated task” of court modernization. Georgia and Rwanda were the country stars over the period, accompanied by a 65 percent per capita income jump in the former as new insolvency and securities laws were introduced along with a one-stop investor shop for building approvals and electricity hookup. Rwanda’s signature feats were in property registration with tax and on-line improvements, and in central credit information and scoring for banks and microfinance providers. Colombia was Latin America’s top performer with strides in electronic tax payment and collateral practice; its perfect legal rights index score is matched by only two other countries. Egypt’s Middle East gains came almost entirely before 2009 with lower minimal capital requirements and retailer inclusion in the national credit bureau. In Asia China was the winner over the longer timespan, but India has promoted regulatory changes the past five years and especially since the Modi government took office in 2014. VAT filing was simplified in 2010, and new Companies Act amendments facilitate launch through faster and easier application and reporting. Construction procedures have been slashed through a “single window,” and overlapping inspections reduced for power connection. In the OECD Poland has been the standout with better judicial system functioning and bankruptcy statutes.

In 2014-15 over 120 of the 190 economies tracked managed at least one reform. Of the leading ten half were African, including Kenya and Uganda. Costa Rica and Jamaica surged as smaller regional states and Cyprus and Kazakhstan were surprise showings under deep banking crises. In the overall top 20 ranking Lithuania and the Former Yugoslav Republic of Macedonia entered, with Asia dominating the first 10 through Singapore, Hong Kong and Korea. Their placement tends to correlate with World Economic Forum competitiveness and Transparency International corruption results, the review noted. It added that efficiency and quality are usually linked as in Greece’s “vicious cycle” land administration approach. Real estate transfer takes three weeks, maps and statistics are absent, and transactions which collapse based on bad information are uncompensated. Dispute resolution is the longest in Europe, over 4 years, with only Guinea-Bissau, Suriname and Afghanistan beyond that duration in the Doing Business findings. Most of that period is the wait for an initial hearing, and in insolvency questions claimant may only recover one-third of value. Case management has improved there from a low base, and a wave may soon be unleashed under the EU rescue’s bank recapitalization, which must tackle the 50 percent NPL ratio and lift the mortgage foreclosure ban in place during the political chaos of the Syriza party’s leadership transition. Reflecting investor amicability the stock market was at the bottom of the MSCI Index with a 50 percent loss through October, as it reverted to the emerging status of a dozen years ago.

Corporate Debt’s Spin Cycle Splotch
2015 November 4 by admin

Posted in: General Emerging Markets
As corporate bonds entered the last quarter with big CEMBI components Brazil and Russia demoted to high-yield and issuance off 30 percent, sell side houses have tried to pre-empt crisis talk by citing normal features of business cycle correction, including more cautious borrowing and operating approaches. Emerging market GDP growth will stay around 4 percent on average though next year, a modest margin over advanced economies, with China and India continuing to lift Asia in comparison with Europe and Latin America. Commodity prices will remain weak, and that category is one-quarter of the corporate external debt universe just behind financials at one-third. Large quasi-sovereign oil and gas names dominate the group, with Latin American exposure the greatest by region and state support is assumed should troubles persist in light of strategic and subsidy policy implementation values. Currency depreciation will also continue against the dollar into 2016 but has benefited commodity producers through lower local costs, and management in Brazil, Russia, Kazakhstan, South Africa, Colombia, Indonesia and elsewhere has accommodated this trend for several years. Asian and European units have held up better, and management globally has moved to cut costs and pare leverage in response, according to JP Morgan research.

Gross debt expansion has slowed to single digits, and 2015 issuance will be around $250 billion against the original $375 billion projection, with higher-rated credits half the sum. In recent months several firms have conducted liability management swaps and leverage has come down to under 2. 5 times. Capex rather than refinancing is absorbing proceeds, and dividend and share repurchase programs have been slashed. The high-yield default rate is over 4 percent after Ukraine’s crash, and one-third have involved distressed exchanges. Chinese property which had drawn warnings has turned to the onshore market in the last quarter with official encouragement, and maturities for the overall class were only $20 billion this year. Low-rated bonds below BB have been shunned with that threshold accounting for half the segment’s activity. “Fallen angels” from investment grade like Petrobras and sanctioned Russian companies have worsened financial ratios, but government facilities are available as backstops, the analysis suggests. In Q3 $40 billion of Russian debt matured and 40 percent of that amount was likely in the form of intragroup loans, according to the central bank. In the next twelve months $90 billion is due against reported reserves of $370 billion and no ruble devaluation expectation, it adds.

Petrobras shelved a planned domestic bond placement as lawmakers considered a formal impeachment proceeding against President Dilma Rousseff for fiscal account reporting violations, although she still has not been linked to the Car Wash bribery investigation. However her predecessor and mentor Lula is firmly in judicial sights for alleged influence peddling on behalf of construction giant Odebrecht, and may try to move Workers Party loyalists to his defense by attacking pension reform and other measures already dividing the ruling party coalition. In China too S&P ratings recently noted that the “invincibility perception” of state-owned enterprises may be banished under a looming squeeze as it surveyed the top 200 companies by revenue. Leverage risk is up and recovery is not “on the horizon” as construction, transport and mining borrower prospects are dim under likely short-term scenarios.

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Singapore’s Hazy Future Funk
2015 October 29 by admin

Posted in: Asia
Singapore shares were down 20 percent on the MSCI Index through September, as the economy tipped into quarterly recession and the area wildfire haze threatened a further blow to construction, tourism and retail sales which had offset lagging exports to China. Two years ago the smog caused millions of dollars in losses and this episode will be aggravated by the worst El Nino dry spell in two decades. At the same time Prime Minister Lee Hsian Long, after a landslide re-election victory where the ruling People’s Action Party took all but six of parliament’s ninety seats, convened a task force to chart the island hub’s future in light of global conditions and domestic demographics posing “severe challenges” to traditional manufacturing and financial services strengths. The committee will focus in particular on raising small business innovation and productivity, which lags despite the number two ranking in the World Economic Forum’s Competitiveness Report across a range of education, infrastructure and technology indicators. In the region, Hong Kong was also in the top 10 and Malaysia was 18th overall, and they have been more directly in the spotlight of recent financial market hazard, but Singapore has also been stuck in credit and real estate bubbles and rigid currency policy unnerving investors.

It is one of the last remaining AAA-rated sovereigns with huge current account and fiscal surpluses, and government debt under 50 percent of GDP. However the recent passing of independence visionary Lee Kuan Yew, the prime minister’s father, underscored the population’s rapid aging, and income inequality has also become an issue the past decade. This fiscal year the government shifted course to increase health and social spending for the elderly and poor, and funded it with a 2 percent marginal income tax rise to 22 percent. Business sentiment soured as measured by Dun & Bradstreet’s optimism index on the redistribution drift at odds with the founders’ commercial laissez-faire tendencies. Critics assert that such “welfare state” drag will contribute to anemic 2 percent GDP growth for 2015, but lackluster cross-border ASEAN commodities and capital markets activity are likewise to blame as sudden obstacles. Agricultural trading house Olam was also caught in alleged misreporting that damaged the sector’s reputation, and provoked doubts about general corporate governance practice.

The main ongoing wobble has been from two consecutive years of falling house prices, after banking restrictions were imposed in 2013 to cap the borrower debt/income ratio at 60 percent and stamp duty was hiked. Values were off around 7 percent from the peak as of end-June, and the benchmark SIBOR as the mortgage reference rate is at a post-2008 high. Bank credit soared 55 percent since the crisis and is now at 155 percent of GDP, with household debt alone at 45 percent. Offshore lending has also been brisk to Greater China, Japan, Korea and Southeast Asia at over $150 billion, and overall non-performing assets are still low but recently reached 1 percent. The government may loosen the loan/income limits if price decline deepens and can also remove property supply from the market, and it may be pushed in this direction as the re-election afterglow fades.

Monetary policy may also be eased to stimulate growth through realignment of the complex exchange rate regime, with formulas for bands and sloping curves against major currencies, and the Singapore dollar’s single-digit drop against its US counterpart could then worsen. Critics argue that the approach should be replaced with a simpler more flexible mechanism for interest rate signaling without overwhelming control from Monetary Authority technocrats. Foreign exchange reserves at S$350 billion, along with sovereign wealth fund holdings, are ample enough to allow for experimentation, but the new economic task force is not charged with examining the issue. The state-run Temasek investment arm has also come under scrutiny for heavy mainland China exposure in several asset classes, and the stock exchange has angered investors by courting questionable frontier market listings from Burma and elsewhere. While the forest fire air may eventually lift, the real estate credit and competitive haze lingers to choke confidence into the Lee family’s repeat term.



Originally published on Asia Times www. atimes. com



Iran’s Stifled Stock Market Sanctions Relief
2015 October 29 by admin

Posted in: MENA
The Tehran stock exchange continued its post-nuclear deal descent with the benchmark index losing 10 percent in the nine months through September, as daily trading volume and the average company price-earnings ratio at 5 reached new lows. The major listed sectors including autos, petrochemicals, mining and banking are all in recession “bordering on crisis,” according to the Economy Minister, who received $100 million in industry support from President Rouhani mainly for carmakers like Khodro, which previously thrived during a joint venture with France’s Renault. European and Asian business delegations have been regular visitors since the July accord was announced and won parliamentary backing both in Washington and Tehran despite conservative member opposition. Iranian oil and financial officials have also been active on the external conference circuit, most recently at the annual IMF-World Bank meetings in Peru, but direct and portfolio investments have not materialized without dismantling of immediate sanctions and decades-long economic distortions.

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

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

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

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

Originally published on Asia Times www. atimes. com

Peru’s Hesitant Host Gestures
2015 October 22 by admin

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

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

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

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

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

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

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

Corporate Leverage’s Hectic Hoist
2015 October 13 by admin

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

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

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

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

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

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

Ghana’s Unguaranteed Attitude Adjustment
2015 October 6 by admin

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

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