No More Learning

It came despite moderation in overall distressed credit below under 70 cents/dollar, where the portion improved to 6. 5 percent from 9. 5 percent at mid-year, as the EMBI spread stands at 450 basis points over US Treasuries. Near $30 billion was unpaid, with Brazil’s Oi accounting for one-third and three Latin American names together 60 percent of the total. Missed interest owed and restructuring-bankruptcy was the main cause, along with discount and forced exchanges. China’s onshore market experienced dozens of cases but offshore was spared despite “close calls” like Glorious Properties, which needed a grace period. Europe’s 3. 5 percent level came mostly from Ukraine, followed by Russia and Turkey. Africa had a big Nigerian oil firm default, but the headline bare miss was Venezuela’s $7 billion PDVSA quasi-sovereign swap with participation short of the 50 percent threshold. Coupon and amortization obligations are $8. 5 billion over 2017 with residual credit event risk, the analysis cautions. In the last quarter commodity price recovery, capital spending retrenchment and liability management offered a rating downgrade respite, but demotions at almost 350 were triple upgrades for a 2016 “negative bias. ” Value recovery approached half 2015’s 49% norm, with Latin America and Europe lagging and Asia largely in line with the above 50 percent historical trend. One of the top results was Ukraine Railway over 80 percent while Colombia’s Pacific Rubiales and Brazilian corporates were at bottom. China property firm Kaisa was an initial casualty but the outcome a “pleasant surprise,” while Mongolian Mining prices jumped from the teens to the 50s after negotiations. From this year 100 percent-owned quasi-sovereigns will be excluded from the company default tally, with PDVSA still on the watch list after the recent distressed transaction. Issuer removal after non-payment enabled 25 basis point shrinkage on the CEMBI benchmark, and the under 50 cents/dollar most impaired category remains dominated by Brazilian and neighboring and energy industry bonds.

The 2017 forecast is for a drop to 2 percent after the peak default cycle, with maturity pickup “benign” and economic fundamentals “stabilizing,” according to JP Morgan. However in specific countries, including Brazil where a corruption saga lingers, it warns of continuing risk aversion. Repayments from speculative and unrated issuers will be $60 billion, up from $35 billion last year but should be manageable, aided by ongoing buyback operations and insolvency code overhauls. On the latter, the IMF released an update on sovereign bond collective action clause incorporation to facilitate the workout process, with 75 percent of the $260 billion nominal amount containing them the past two years. New York law has a 90 percent incorporation rate, 10 percent above English jurisdiction. Modified pari passu provisions are routinely added, and the undertakings have “no observable” pricing effect, the Fund believes. The outstanding stock without these inserts is $850 billion, and trusts are increasingly replacing fiscal agent structures for contractual implementation responsibility. Future outreach will target Africa, Asia and non-euro Europe with less participation as sponsors try to assert their collective will, the document adds.

Japan’s Errant Helicopter Heave
2017 January 10 by admin

Posted in: Asia
Japanese investment trusts continued net emerging market fund outflows as domestic bond yields turned positive and the Nikkei index was up 5 percent through December on over 5 trillion yen in central bank annual ETF buying for 60 percent of the market. New UN statistics boosted the economy’s size on estimated 1 percent growth this year and next on indications that monetary policy will switch from quantitative easing to government bond absorption in gradual “helicopter money” fiscal stimulus. Officials will target long-term yields above zero in an effort to encourage 2 percent inflation expectation, as prices again verge on deflation and the yen settles in the 105/dollar range after an immediate post-Trump election plunge. Business sentiment as measured by the Tankan survey has improved but manufacturers remain wary of China and other key overseas markets. The central bank is now a top shareholder in one-third of listed companies, and has begun to draw criticism from the over $1 trillion state pension fund and other institutional investors for large block control affecting values. The so-called third structural reform “arrow” of Abenomics has also stumbled with US rejection of the Trans-Pacific Partnership, and the Prime Minister flew to New York for a brief meeting with President-elect Trump to get reassurance on bilateral commercial and military ties. Tokyo continues to be evaluated in the Treasury Department’s regular currency manipulation analysis, and the Republican candidate called for possible renegotiation of the Okinawa base presence to secure more local payment and personnel. Japan “hawks” in Washington have resurfaced from 1980s battles urging tougher trade stances, but the argument is blunted by the country’s recessionary “lost decades” since which have also reversed banks’ global power and profitability. Smaller regional banks are struggling again with the zero-interest rate policy and anemic borrower demand, while mega-lenders have rediscovered export finance niches abroad which have come under pressure with slowing trade. In recent years they have expanded into frontier markets like Myanmar bolstered by aid agency programs which may soon be retrenched on human rights and foreign opening setbacks. The civilian-military regime headed by Nobel laureate Aung San Suu Kyi has been in the spotlight for alleged abuses of the Muslim Rohingya minority, forcing large-scale exodus to neighboring countries by land and sea. Despite headline 7 percent growth and sanctions lifting, liberalization and privatization efforts have been halting and banking and the nascent stock market still lack basic oversight.

Singapore stocks were flat through December as the hub endured a Q3 4 percent contraction on a double-digit slide in non-oil domestic exports. Local foreign exchange deposit growth has shrunk noticeably with the unwinding of China-oriented carry trades, and real estate prices have likewise softened with reduced Chinese purchases. The monetary authority has kept a neutral stance into 2017, while allowing “some flexibility” to ease especially if deflationary tendencies persist. Bank bad loans are creeping toward 4 percent of the total, and the local dollar has been in the cross hairs on more services weakness and safe haven reputation harm with implication in Malaysia’s 1MDB scandal. The Prime Minister also took a personal blow after a special appearance with President Obama to promote TPP before the treaty was consigned to the chopper.

Israel’s Pesky Path Breaking Provocations
2017 January 10 by admin

Posted in: MENA
Israel stocks were down slightly into year-end as the US refused to vote against a UN resolution condemning West Bank settlements as the outgoing Obama administration assigned both sides blame for the failure of Palestinian dual state peace talks despite Secretary of State Kerry’s shuttle diplomacy frenzy. The incoming Trump team criticized the action and named hard-line supporters as Ambassador and special Mideast envoy while proposing Embassy relocation to Jerusalem. Prime Minister Netanyahu ignored the call as he continued with expansion of housing developments as a way to firm his party’s ideological base and offer alternatives to unaffordable urban real estate which has recently featured as a major campaign issue. Consumption-driven GDP growth topped 3 percent through Q3, and that pace should extend into 2017 with unemployment at an historic low 4. 5 percent. The current account surplus will also continue above 3 percent of GDP without export restrictions to the US with a 30 percent share, manageable oil import costs and minimal 5 percent foreign investor bond market inflow reliance. Deflation is over and the strong shekel should cap inflation at 1 percent without the central bank raising rates despite the Federal Reserve’s projected path. Geopolitics and wage pressure could upset the mix, but fiscal policy provides room with the deficit under 3 percent of GDP after a VAT cut. The “A” credit rating is intact with public debt at 60 percent of output, and commercial and assistance-related fundraising considered accessible over the medium term. The Prime Minister’s Likud Party remains relatively unchallenged with the opposition coalition in disarray, and he has survived serial scandals including an investigation into his wife’s alleged personal and official spending overlap. The Labor Party has yet to reconstitute as a strong rival, and its absence was noted by international dignitaries attending the funeral of longtime stalwart and President S. Peres.

Lebanon was up 5 percent on the MSCI frontier index through December as the lengthy impasse over a new president ended with 80-year old former general Aoun, a Christian, taking the post with dominant Shia party Hezbollah’s consent. Palestinian and Syrian refugees cannot vote and the latest census put the Christian share of eligible participants under 40 percent. President Aoun named security and economic overhaul as chief priorities, with the eventual intent of repatriating 1 million Syrians after the civil war finishes and remedying chronic electricity and public service deficiencies. Traditional Gulf visitors have shunned the beaches and nightlife with their own troubles and cross-border spillover of factional conflict resurrecting ghosts of the 1990s period. Morocco after demotion to frontier status was ahead over 15 percent as the ruling Islamic party was snubbed in favor of the insurgent Modernists promising faster growth than the current 1 percent and 100,000 jobs and state debt restraint. With an IMF backup facility, the government in power since the Arab Spring appointed by King Mohammed pared the budget gap to 4 percent of GDP with energy subsidy adjustment. Democracy activists assert that the monarch still exercises pervasive control and that family cronies are not held accountable for poor performance and scandal. They also note that phosphate giant OCP has entered deals with other authoritarian regimes including a $3. 5 billion venture just announced with Ethiopia where breakaway province unrest has been quashed.



Ukraine’s Borderline Bank Rescue Recoil
2017 January 3 by admin

Posted in: Europe
Ukraine bonds solidified EMBI index double-digit gains after the central bank, following months of hesitation in directly confronting industry leader Privatbank’s $5. 5 billion capital shortfall, seized it in a move that will swell the budget deficit that must stay within 3 percent of GDP under the IMF program, and exact bank bondholder pain under bail-in provisions. President Poroshenko appealed for calm and submitted legislation to further protect its 20 million depositors, as the political opposition lambasted the bailout as a “great robbery” and called for fresh snap elections. Shareholders headed by well-known oligarch Kolomolsky, who underwrote military operations to eject Russia-backed rebels from the East, had put in millions of dollars in a last-ditch bid to shore up the institution with a 40 percent bad loan portfolio and near-default credit rating, after rival Delta Bank was closed last year for prudential violations. The magnate had fallen out of favor as the border conflict drew to a standstill and suffered losses on other business holdings on meager 1. 5 percent GDP growth this year. Ukraine may soon be left to face the incursion on its own as incoming US President Trump has placed warmer relations with Russia seemingly higher on the agenda to include possible sanctions removal. Banking and geopolitical woes have overshadowed energy reform as Naftogaz tariffs went to full cost recovery, and anti-corruption agency and electronic tax filing launch which met Fund disbursement criteria. Releases continue to be delayed but front-loading and replenished reserves have reduced urgency, and the government pledges to tackle outstanding pension and privatization issues in the coming months assuming survival of no-confidence votes. Inflation is to fall to single digits in 2017 within a target band, but the currency could again falter toward 30/dollar to undermine control. So long as Russian commercial restrictions remain in place and the Dutch and other reject EU bilateral free trade, depreciation will offer only a limited export boost and the current account gap will be frozen around 4 percent of GDP and depend on future official financing to bridge it. In FDI agriculture has been a bright spot as the country may soon ranking third globally in food output after the US and Brazil. Giants like Archer-Daniels, Cargill and Bunge have leased vast local tracts, with outright ownership still prohibited and sales subject to a moratorium through 2018. The richest lands are located in the war zone around Donbas, and operations there have been erratic with fighting eruption despite a nominal ceasefire.

Russian stocks continued to rally as Emerging Europe champions notwithstanding the prospect of new US congressional penalties for cyber-attacks to affect the presidential contest. Oil price rebound to over $40/barrel has been the overriding positive economic story against the backdrop of persistent recession and 5 percent-plus inflation. Although mortgage rates have reverted to pre-crisis levels, consumer borrowing and sentiment is lackluster, with retail sales off 5 percent in October. President Putin, who will decide on another run for 2018, has charged the Finance Minister with drafting an ambitious structural reform agenda, but previous blueprints were routinely ignored. The central bank stayed on hold and reiterated the importance of ruble free-float as an eventual competitive safety valve, but many foreign investors preferred to focus on the Trump Administration’s tapping of former Exxon chief executive and Putin ally Tillerson as Secretary of State for a tactical buy.

Capital Flow Management’s View Vagaries
2017 January 3 by admin

Posted in: General Emerging Markets
The IMF published an updated paper on issues and trends informing its “institutional view” on capital controls since 2012, a period of greater openness and volatility addressed mainly with macro-economic and prudential policies as opposed to strict movement limits. The G-20 and OECD continue to debate revised frameworks and multilateral consistency as direct and portfolio flows recover while still lagging pre-crisis levels, particularly on bank loans and derivative transactions. In recent quarters they have swung several points as fraction of GDP often due to global shifts such as during the 2013 Federal Reserve “taper tantrum. ” Both push and pull factors contribute and domestic emerging market risks increasingly focus on both corporate and sovereign balance sheet weakness. Funding costs dropped this year aided by better current account performance, but the reduction may not last, according to the analysis. Two dozen countries such as Brazil, India, Russia, South Africa and Turkey resorted chiefly to fiscal and monetary responses, including currency depreciation intervention, to handle reversals. China and Peru loosened policy while imposing outflow curbs, while broader emergency restrictions applied in Cyprus, Iceland, Greece and Ukraine to prevent bank deposit flight and exchange rate collapse in the context of Fund adjustment programs. They typically followed previous recommendations as to scope and timing with unwinding linked to general financial sector stabilization, but also added costs in terms of administrative burden, risk premium, and market distortion. In the latest 2013-16 timeframe economies like Colombia and Thailand relied on macroeconomic tools almost entirely to counter surges as a wider range of countries adapted bank rules on loan-to-value and debt-to-income ratios as well as capital and liquidity standards. Frontier market experience in Africa and elsewhere has been different as they only began accessing global bond markets in recent years and exchange rate changes have been slower. Ghana and Nigeria introduced controls both in law and practice that were subsequently relaxed, although the latter remains suspended from JP Morgan’s local debt index for lack of access. The paper acknowledges that easy advanced economy monetary policy magnified direction but argues that improved regulation across-the-board on Basel III norms, insurance, accounting and derivatives mitigated pressure.

China will continue the capital account liberalization pattern according to its next 5-year Plan, as neighbors like Korea also relax repatriation conditions. Sequencing reflects the Fund’s preference to begin with direct investment and delay short-term portfolio opening until last. Beijing in 2015 started to tighten outflow flexibility, first with suspension of the Qualified Domestic Institutional Investor scheme, but it insists such moves are temporary and the yuan’s inclusion in the SDR basket should reinforce freer securities participation. The OECD is now reviewing its 25-year old Capital Movement code with attention to macro-prudential treatment, and the proposed Trans-Pacific Partnership, although scrapped with US failure to ratify, nonetheless detailed disruptive flow provisions. In Europe the Vienna Initiative and new Single Supervisor have developed formal and informal regimes for cross-border bank credit, and cross-regional bodies have collaborated on joint supervision. The Fund has strengthened technical assistance on the issue on missions to poorer members like Bangladesh and Myanmar, but global data gaps persist despite improvement in the Coordinated Portfolio Investment Survey. As the IIF tracks for a half dozen developing economies, a questionnaire completed by 40 members recommended more frequent even daily numbers for a worldwide cross-section matching information flow.

Haiti’s Battered Runoff Replay
2016 December 27 by admin

Posted in: Latin America/Caribbean
As Hurricane Matthew devastation lingered in a large swathe of the island outside Port au Prince, Haiti’s chronically delayed presidential election was finally held with just 20 percent turnout, but a winning 55 percent voting share by the former incumbent’s designated successor, banana farmer J. Moise. The second place candidate Celestin was 35 points behind and again alleged widespread fraud that will be investigated in a partial result audit. His victory was slimmer in the original 2015 contest that was annulled after violent protests and rigging suspicions, and the opposition Lavalas party has indicated a willingness to cooperate after such a prolonged confrontation in part to rebuild after the latest natural disaster, which has overwhelmed UN relief pledges. The IMF offered a no-interest $40 million emergency facility and estimated damage at one-fifth of GDP. The 2010 earthquake which leveled the capital wreaked far greater destruction calculated at $8 billion but also a commensurate aid response, although the government and partners jointly admit to ineffective coordination that has left thousands still living in makeshift tent cities and a 60 percent poverty rate in the hemisphere’s poorest country. One-fifth the budget still comes from international assistance and the $2 billion remittance lifeline is double exports and FDI together. Officials set up a new centralized reconstruction agency to guide efforts into the next administration, and President-elect Moise intends to prioritize agriculture, corruption and climate change. He was previously head of the local chamber of commerce, and was favored by influential families with large industrial and financial holdings in the race while campaigning as a political novice outsider. His farming enterprise had close ties to former President Martelly, but unlike other allies he avoided scandal taint and criminal gang rivalry. His experience with foreign investors was limited but over the past year and a half speeches seemed to extend promotional efforts which may be smaller-scale than showpieces like the US and Inter-American Development Bank-backed Caracol free trade park, which failed to generate promised employment and infrastructure.

Cuba and Venezuela have been allies, but their influence has waned with their own economic setbacks and leadership transitions. Fidel Castro’s death at 90 highlighted the grim competitive and growth outlook after years of incremental reforms pushing hundreds of thousands to private sector small ventures, while keeping the main commodities and tourism mainstays under comprehensive state control. Exchange rate unification does not feature on the near-term agenda despite urgent foreign business pleas, and the US embargo may now remain in place under President Trump, who assigned a staunch advocate to his Treasury Department planning team. Cuban secondary debt and the closed-end Herzfeld fund prices jumped after the leader’s passing was announced but soon settled at previous ranges with marginal GDP growth forecast this year and likely economic and diplomatic impasses ahead, aggravated by the withdrawal of Caracas’ support as President Maduro’s regime clings to survival. He removed 100 bolivar notes from circulation in an effort to curb smuggling and hyperinflation estimated at 500 percent, on 10 percent output contraction and a 25 percent of GDP fiscal deficit. The state oil company completed a short-term bond swap to avoid default and had to sweeten initial terms as the government also relaxed bank reserve requirements for allocation to strengthen shelter.

China’s Wooly Work Conference Antics
2016 December 27 by admin

Posted in: Asia
Chinese stocks scrambled for traction despite equity raising up 30 percent through December and a record 50 IPOs in November, amid general securities panic with bond market futures suspended on a sudden 100 basis point 10-year sovereign yield spike coinciding with the US Federal Reserve 25 tick nudge. The central bank injected RMB 600 billion in immediate liquidity to calm nerves, as the Central Economic Work Conference convened with the motto “pursuing progress while maintaining stability” and proposed additional fiscal stimulus and exchange rate flexibility. The onshore-offshore Yuan gap has widened to imply a near-term 7/dollar level, with reported monthly capital outflows increasing to $70 billion in November, and hard currency bank deposits up 10 percent. The authorities have cracked down on outbound credit card, insurance and company acquisition channels in preparation for January’s reset of the individual $50,000 access cap, as multinationals cite blockages and delays in money transfers which could stifle future FDI. According to the IIF and other public and private sector sources the biggest outflow category continued as loan repayment and portfolio exit at $300 billion though Q3, as compared with an estimated $90 billion in resident capital flight. November data showed solid industrial production and fixed asset and real estate investment with high single-digit gains, and retail and property sales ahead at double that pace to attain the 6. 5 percent GDP growth target. However developer bond sales have come to a screeching halt with dollar yields hitting 7 percent and local issuance through the Shanghai exchange affected by stiffer requirements. Mortgages remain the bulk of new loans and although ratings agencies assign a stable outlook, big players like Vanke have started to forecast hefty housing price drops into 2017. Banks will no longer be able to mask exposure through off-balance sheet wealth management products under revised rules scheduled for the first quarter, as shadow credit exploded toward end-2016 with trust loans at a 2-year peak.

The IMF repeated the urgency of tackling the 170 percent of GDP corporate debt, with 800 billion due next year, one-third foreign. Moody’s puts defaults close to the 3 percent “danger line” among the 3500 firms rated, as the Fund noted the absence of “buy-in” across government and business levels for restructuring. The stakes have increased as the incoming Trump administration signals tougher commercial and diplomatic policies, and the US and EU sustain objections to “market economy” treatment 15 years after WTO entry to facilitate anti-dumping penalties. Beijing threatened “real crisis” if Washington changed the One China practice to explicitly recognize Taiwan, and trade retaliation since China takes 15 percent of US exports. A special White House Trade Council was established with academic critic P. Navarro in charge, and Commerce Secretary-designate Ross has blamed unfair competition for gutting manufacturing firms his distressed fund acquired the past decade. Against this backdrop once popular Chinese debt has disappeared from the most-frequently traded list in EMTA’s quarterly survey, while India has catapulted to the top, followed by Brazil, Mexico and South Africa. Of the $1. 25 trillion turnover, two-thirds was in local currency and the external category was evenly divided between corporate and sovereign as investors gird for rough work balance.

Iran’s Extended Sanctions Slant
2016 December 21 by admin

Posted in: Asia, MENA


The Tehran Stock exchange index dropped 5 percent, as President-elect Trump won the contest with a signature vow to “rip up” the Iranian sanctions relief for nuclear monitoring accord with the US and five other countries. He also nominated an ardent congressional critic as intelligence agency chief who recently lambasted new Treasury Department guidance allowing possible participation in minority owned Revolutionary Guard indirectly-controlled ventures. Congress before adjourning to usher in the new administration passed a 10-year renewal of core bilateral sanctions still banning financial system dollar access. Iranian banks are to fall under stricter regulation with proposed new legislation as bad loans may be double the 15 percent of the total officially reported. A handful of second tier Asian and European banks have forged correspondent relationships, and an EU thaw in wholesale prohibitions against the big state-dominated lenders implicated in terrorist finance may have begun with Bank Saderat’s likely removal at Greece’s request. The Joint Plan of Action uncertainty overshadowed a $5 billion venture announced with France’s Total and China’s national oil company in the South Pars field, as OPEC members with Iran’s return to 2 million barrels/day announced production cutbacks to boost the world price. Real estate and telecoms have also drawn foreign interest as Vodafone entered a local partnership and malls and office towers are under construction with Gulf, Turkish, German and other international tenants. Germany’s Economic Minister visited in October with over 100 business executives in tow to focus on infrastructure in particular with rail, energy and metals contract signed. The auto sector was a major stock market stock market draw as France’s Citroen and a subsidiary of the giant Saipa conglomerate are in cooperation talks, as Renault negotiates on a direct government operation. The IMF forecast was upbeat for the fiscal year ending March 2017 with 4. 5 percent GDP growth and 9 percent inflation, as it repeated calls for banking and exchange rate system cleanup. Financial listings continue as equity laggards, and the free-market rial/dollar rate has slipped below 35,000 earlier seen as a floor.

Egypt was down 20 percent on the MSCI index through November as the cost of a $12 billion agreed Fund infusion was free float of the pound, which careened from the official 8 to over 15/dollar in commercial trade amid continued shortage. An initial $2. 75 billion was disbursed contingent on big fuel subsidy and civil service cuts and VAT introduction to contain the 10 percent of GDP fiscal deficit. Inflation could hurdle toward 20 percent with currency pass-through before consolidation, but tourism down 40 percent annually could benefit a cheaper destination aided by the lifting of source country travel warnings. However a bombing at Cairo’s main Coptic Christian church has again heightened security jitters as President Al-Sisi’s popularity rating dips toward 60 percent. He was one of the few foreign leaders who met with President-elect Trump while he was the Republican candidate as the new team in Washington may adopt a warmer diplomatic stance. Gulf ties have frayed as the GCC suspended $10 billion in annual aid to focus on its own budget and current account woes, and remittances as a key lifeline have also slipped and could spike current 15 percent unemployment which angry youth and democracy activists may no longer sanction.

Central Asia’s Frozen Financial System
2016 December 21 by admin

Posted in: Asia, Europe
A new World Bank report examining Emerging Europe and Central Asia’s 25-year financial sector reform record cites recovery since the 2008 crisis, with lingering weakness in a boom-bust credit pattern and lack of non-bank and securities market diversification. Regional bad loans average almost 10 percent, and compliance with Basel III and EU regulations has been elusive particularly in the least open eastern economies. Several countries at different development stages including Russia, Turkey, Armenia and Tajikistan signed the Maya Declaration on financial inclusion without underlying resilience to reach targets. Since independence banking’s fraction of GDP quadrupled to 55 percent but the late 1990s and 2000s featured consecutive crashes sparing only the least integrated and backward systems. Liberalization and control trends have exacerbated swings, and liquidity bubbles illustrated by 200 percent range loan-deposit ratios joined with foreign currency mismatches for major shocks. The “spare tire” of other savings products through insurance and capital markets lags other developing regions, and policymakers should set priorities across the matrix of stability, efficiency, inclusion and depth considerations for better performance, according to the study. From a long-term growth standpoint the greatest impact is through deeper engagement and penetration of households and firms, with the latter benefiting especially from stock market new equity issuance. Small business access is limited and low bank trust, around 50 percent in surveys, inhibits individual participation. However splits between expanded use and soundness and other factors are “inadequately addressed” as central banks, finance ministries and government agencies often work at cross-purposes and lack overarching strategies. The IMF and World Bank were involved in early efforts but country authorities have increasingly assumed ownership as in Ukraine’s working group approach under its latest aid program. These blueprints have improved over time but still fail on basic communication and coordination measure and are frequently absent altogether, leaving officials, intermediaries and investors without a common design.

Central Asia and Russia have the most scope for better balance, while Armenia is among the bottom-up leaders still missing overall sophistication. The Czech Republic and Poland are the strongest across indicators, while the Western Balkans is behind on efficiency. Turkey’s emphasis should be on stability through macro-prudential limits with recent years’ credit volatility, the authors suggest. They conclude that the top challenges should be tackling high NPLs, establishing cross-border supervision, running crisis simulations, overhauling state bank governance, and broadening electronic payments networks. Capital markets are often small and could achieve scale with neighbor tie-ups, but international financial center ambitions as in Istanbul, Astana and elsewhere may be extreme. Private pension fund schemes that build the institutional investor base have been overlooked and their portfolio guidelines should not be weighed down with government funding requirements. Poland’s pools shrank with recent social security takeovers and the stock market was off 10 percent on the MSCI index through November. Frontier components with nascent or absent “pillar 2” frameworks were mixed for the period, with Croatia and Ukraine leading the pack with over 15 percent gains; Lithuania and Slovenia with heavy losses; and Estonia, Romania and Serbia flat to modestly positive on shifting spare tire readiness.

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Brazil’s Deconstructed Scandal Sketch
2016 December 14 by admin

Posted in: Latin America/Caribbean
Brazilian shares held on to MSCI-beating 70 percent and EMBI-leading 20 percent gains through November, as the arrested former chief executive of construction giant Odebrecht admitted to kickbacks in a plea deal set to implicate dozens of other members of the business and political elite. The bombshell verdict came as preparations mount for former President Lula’s corruption trial, and the interim Temer government handles new cabinet minister accusations of misconduct in a property transaction. The ceaseless scandal barrage has diverted attention from fiscal reform proposals on state finances, pensions, and long-term spending, as lawmakers in their shadow introduce legislation to place the judiciary on investigative notice and strip its immunity. GDP contracted 3. 5 percent in Q3 and next year minimal growth forecasts have been further pared to the 1 percent and under range with industrial output down double-digits. Inflation with the output slack and stronger real toward 3. 3/dollar has retreated to a likely 5 percent next year, which will enable several hundred basis points of central bank easing in principle. The primary fiscal deficit will remain constant around 2. 5 percent of GDP as public debt creeps up toward 80 percent with residual commitments for provincial rescues. In the balance of payments, the current account hole should stay 1 percent of GDP on good commodity export and foreign direct and portfolio investment numbers, with the latter aided by reconsideration of Mexico’s prospects with President Trump in office. State banks are rationalizing operations and credit books with the headline NPL ratio at 4 percent, but the sector is grappling with a wave of major corporate bankruptcies including the Oi $20 billion telecoms default. Local and foreign creditors have appointed different advisers, and talks have been acrimonious with reference to a possible two-thirds haircut. According to S&P Ratings almost 30 borrowers have been unable to pay in 2016, and restructurings are lengthy and complicated despite recent liquidation procedure overhaul. The biggest debtor Petrobras has been promised domestic and international funds for working capital as it tries to sell assets, including select field rights. On the sovereign front the country as a net creditor became the first developing economy to join the Paris Club, as it may face Portuguese-speaking African exposure in Angola and Mozambique.

Argentina share and bond index advances are in high single-digits a year after President Macri’s election win, and ahead of mid-term legislative polls in 2017, which should keep the House and Senate party configurations intact, but act as a government early economic policy referendum. Growth should be 3 percent next year after 2016’s equal shrinkage on solid agricultural exports and consumption revival, with lower inflation estimated at 15 percent. Real interest rates remain at 5 percent, and bank stocks could take off with personal lending after a long absence during the Kirchner administrations. Social and infrastructure spending will sustain a 5 percent of GDP fiscal gap despite a tax amnesty that may collect $10 billion and staple subsidy rollbacks that dented the President’s popular approval. External debt appetite has surpassed original expectations with $40 billion raised this year in dollar issuance at home and abroad, with a heavy amortization and servicing schedule in the coming months. FDI in contrast has been paltry at $2 billion despite high energy sector interest with tariff adjustments, and critics note that reputation reconstruction still awaits long-term allocation.

Greece’s Unrelieved Debt Digression
2016 December 14 by admin

Posted in: Europe
Greek stocks joined European neighbors with double-digit losses through November after US President Obama on a valedictory visit prodded Brussels for further official debt cancellation, and German Finance Minister Schaeuble dismissed it as a “disservice” ahead of a December Eurogroup meeting dominated by French and Italian election angst. The IMF has argued for an additional break as well while still refusing to participate in the latest program, despite Economy Ministry criticism. The Stability fund holding sovereign bonds may consider long-term fixed rate swaps extending and reducing the load in net present value terms, but operations have yet to be approved. GDP growth was almost 1 percent in Q3 on the best export and consumption performance since 2008, but recession will linger this year before 1-2 percent expansion predicted in 2017, when a 2 percent primary fiscal surplus is the target.
Bank deposits rose in October, but the overall EUR 125 billion is the lowest since the early 2000s. The bad loan ratio is stuck at 40 percent as a “huge problem,” according to the Eurozone single supervisor, as Piraeus and National Bank look to enlist foreign distressed debt managers so they can again increase private sector credit, but mortgage foreclosure rules remain in flux and exporters are owed EUR 1 billion in tax rebates clogging cash flow. Prime Minister Tsipras’ popularity is at a nadir as the New Democrats reconstitute under a new leader pledging a business-friendly platform. They have attacked his party’s economic and diplomatic agendas, the latter under fire with rupture of Cyprus reunification negotiations. Island growth has reached 3 percent for a post-crisis high, with tourist arrivals up 15 percent in Q3 on diversion from Mideast security scares.

Turkey with its own 15 percent stock market decline has been a reluctant partner as it also is in a tussle with the EU on a refugee aid for visa-free access deal, with just the first EUR 600 million received of over EUR 3 billion promised. Brussels has criticized President Erdogan’s jailing of thousands of opponents after a failed coup attempt and his proposal to expand the post’s constitutional powers. The lira crashed toward 3. 5/dollar as he repeated suspicions about an anti-Turkey foreign conspiracy and calls for lower interest rates. The central bank commandeered reserves to support the lira and then reversed course to lift the benchmark rate, which should also brake the 5 percent of GDP current account gap. Growth is in the lackluster 2. 5 percent range despite loosening of macro-prudential consumer loan limits, and the currency pass-through threatens double-digit inflation revival. Russian trade and tourism rebound should help accounts into next year, but business confidence will stay shaky with the mass civil servant firings and a previewed referendum on presidential authority which will require parliamentary backing from outside the ruling party. The Czech Republic and Poland have been other share losers, with a coalition reshuffle and speculation over the future of the euro-koruna peg in the former and further relaxation of budget constraints in the latter with reduced mandatory retirement age. The populist government continues to brandish tax measures against foreign banks and retailers, and the 55 percent of GDP public debt statutory ceiling may be formally breached in the confused processes.

China’s Stuttering Strait Talk
2016 December 6 by admin

Posted in: Asia
Chinese A shares continued to languish on the MSCI index into December despite Hong Kong-Shenzhen’s link inaugural, as Taiwan’s component roared ahead 15 percent after US President-elect Trump engaged in direct phone conversation with his island counterpart for the first such bilateral exchange in decades. The call was described as a deliberate harder-line strategy against Beijing on diplomatic, commercial and monetary fronts, with the first 100-day plan explicitly outlining “currency manipulator” designation, as a congressional advisory commission also recommended new curbs on Chinese company American acquisitions. The Obama Administration in its waning days blocked a communications deal citing defense implications, as Beijing authorities signaled their own heightened scrutiny over $150 billion in outward investment from January-October contributing to an estimated $250 billion in Q3 capital outflows and a Yuan trajectory toward 7/dollar. Previously they cracked down on cross-border credit card use and insurance policy purchase as an exit channel, as the central bank reported that offshore renimbi deposits halved the past two years to RMB 1 trillion. Shanghai shares continue to sell off despite the exchange’s earlier Hong Kong connect arrangement, as even the experimental free trade zone has come under pressure to stop flight. GDP growth remains on the 6. 5 percent-plus target, as electricity, rail cargo and bank loan total comprising the so-called Li Keqiang index recently reached a 3-year high. Fixed asset investment rose 8 percent through October, and the property sector accounted for almost one-tenth of output improvement, but retail sales and construction projects have slowed and the combined provincial and central fiscal deficit will top 10 percent of GDP.

The household share of new loans was two-thirds in Q3, and regulators have reportedly ordered a halt to more mortgage business in select cities. The official loan-deposit ratio is 65 percent, but S&P Ratings put it at 80 percent for the biggest banks including off-balance sheet items, and over 100 percent for a swathe of mid-tier lenders. The central bank proposed rules for a “risk cap” on wealth management products, up 10 percent the past year for over RMB 25 trillion outstanding. Home prices continue to increase in 60 of 70 cities, and municipalities such as Nanjing have taken anti-overheating action with a developer borrowing ban. However local government reliance on land sales as a main revenue source weighs against widespread moves, as Beijing tries to forge greater self- responsibility with its formal “no bailout” stance. The state enterprise asset side of the ledger may be in worse shape with over 2000 identified as “zombies,” with total corporate debt due near $400 billion and outsize leverage in heavy industry, building and materials. Hong Kong has felt mainland retrenchment in tourism, luxury property, retail sales and exports, and a November stamp duty hike will further cool housing. Neighboring Macau has returned to growth after a 2-year recession from slack gaming proceeds with the Party’s anti-corruption sweep, as its traditional fiscal surplus likewise slips. Taiwan’s export and output expansion is just 2 percent, and trade and financial relations worsened with the victory of the independence-minded DPP party, which has tacked to seek closer Washington ties. However the container industry had to be rescued and the global tech outlook may be uneven into 2017 despite soothing presidential words.

The CIS’ Stretched Strongman Stridency
2016 December 6 by admin

Posted in: Europe
As US and European election outcomes suggest a softer stance toward Russian sanctions extension and ex-Soviet Union authoritarian leaders sovereign credits have stabilized and bounced, with President elect-Trump’s team reporting a warm phone call with Kazakhstan president Nazarbaev. GDP growth will be half a percent this year, and is due to rise to 2 percent in 2017 with Kashagan field output and higher oil prices and infrastructure building under domestic and China’s One Belt One Road programs. The tenge-dollar exchange rate has settled below 350 as inflation heads towards single digits allowing the central bank to cut the policy rate to 12 percent in November. International reserves are again approaching $100 billion with reduced intervention and the current account expected to return to rough balance. Banking sector consolidation continues with a merger among big state-owned players that may be partially sold through the stock exchange under proposed divestiture plans. The President’s succession remains uncertain amid rumors of poor health, although he has moved security service and family allies into key positions. With currency bottoming, foreign exchange-linked mortgage loan protests have ebbed and authorities otherwise often handle popular discontent as a possible terror threat, drawing condemnation from human rights groups. Washington and Brussels regularly call for peaceful dialogue and greater democracy, but Trump in his initial talks seemed to praise his counterpart’s 25-year tenure and tough governance approach.

Lower-rated Azerbaijan with its own history of media and political crackdowns got into similar trouble on hydrocarbon price correction and massive devaluation, with 3 percent GDP shrinkage this year on accompanying construction collapse. President Aliev put technocrats in charge of an end-decade diversification strategy, and preliminary reforms elevated World Bank competitiveness rankings. Sovereign wealth fund assets are back to $35 billion after diversion for currency and import support, but the current account has remained in surplus with remittance help. After two re-pegs stoked 15 percent inflation, the central bank responded with over 1000 basis points in rate hoists, but the 80 percent financial system dollarization muted their impact. With free float, the manat has since lost 5 percent against the dollar, and although public debt is under 40 percent of GDP, two-thirds is dollar or euro-denominated, and the Sofaz fund may opt for riskier overseas allocation to compensate. Bank cleanup is a major cost and several institutions will be shuttered or restructured, with the fiscal gap set at 5 percent of GDP next year even with recession breakout. The Trump organization branded luxury real estate there at the height of the boom in joint ventures with business executives close to the regime, according to reports.

Latvia and Lithuania maintain top investment-grade ratings and trade has been hurt by the Russian sanctions but they are also wary of the next US administration’s NATO backing as Moscow stages military maneuvers near their borders. Latvia after an IMF-EU rescue has followed a relentless deleveraging and austerity course, and growth recently slipped to 2 percent with bad loans still at 5 percent of the total. High-skilled labor demand could bring wage pressure, and tax reform is in an early stage to fight evasion. Lithuania has demonstrated comparable discipline resulting in Euro adoption, and the new government coalition between the Green and Social Democrat parties vow further moves as internal devaluation no longer rules with such power.



Ghana’s Creaky Oil Machine Clang
2016 November 30 by admin

Posted in: Africa
Ghana stocks continued in a double-digit slump ahead of December elections, where the ruling NDC party with its vast patronage network under President Mahama is again poised to beat the opposition NPP whose same candidate came close in the last contest. Both sides endorse the IMF program’s broad lines despite lapses, as more oil production due next year helps lift 4 percent current GDP growth and relieve widespread power shortages. The fiscal deficit is above target at 6 percent of GDP with lagging revenue collection, and the government is to generate a primary surplus and pare salary costs and non-concessional borrowing in the future. Central bank financing to the Treasury and state enterprises will also be limited, with the latter to float stock exchange stakes under consensus plans. Lower inflation, which may decline to single digits next year, should enable a sizeable cut in the over 20 percent benchmark interest rate. In external accounts commodity exports should pick up in 2017 on firmer oil, gold and cocoa prices, but post-election household demand could raise imports for a stubborn 6. 5 percent of GDP current account gap. Sovereign bond issuance is not a priority for now, and the next effort may be output-linked as the Fund and private sector creditors consider a proposed term sheet for such operations in a working group organized by the Bank of England.

Kenyan shares are off modestly on the MSCI Index with August 2017 elections there pitting President Kenyatta against the yet to be chosen contender from the Cord alliance. Violence has ebbed after a wave of clashes between supporters and security forces, and changes in the poll board to guard against rigging. Observers fear a return to the tribal warfare of a decade ago, but public education efforts have focused on peaceful dialogue and transition as a new less ethnically-exclusive generation of political leaders enters the mainstream. Growth should stay in the 5. 5-6 percent range although bad weather may hurt agriculture, with fiscal stimulus contributing to the 6 percent of GDP budget hole. The central bank cut rates 50 basis points to 10 percent in September on 6 percent inflation, but the new loan ceiling combined with vote uncertainty will cramp household lines, which have tapered to single-digit expansion. In external accounts reserves are up to $8 billion on foreign direct and portfolio inflows to offset current account weakness, and an IMF $1. 5 billion backstop facility is available. Zambia in post-election mode intends to turn again to the Fund for an estimated multi-billion dollar arrangement to cope with the aftermath of copper price collapse and chronic electricity outage. Growth could improve to 4 percent next year, but the fiscal imbalance has worsened with arrears accumulation on an 8 percent of GDP deficit. With external debt already near $7 billion the Finance Minister has ruled out another Eurobond, as the domestic policy rate for borrowing remains above 15 percent on a single-digit inflation target. Currency depreciation has stabilized as the Fund negotiations proceed and other bilateral and multilateral aid providers reiterate their engagement after a tense poll dispute period where the barely losing candidate, a wealthy business executive, tested the commercial and procedural machinery.

Central America’s Migration Wave Slap
2016 November 30 by admin

Posted in: Latin America/Caribbean
Central American credits joined Mexico in absorbing the brunt of post-Trump election repositioning with their own close trade and remittance ties through the CAFTA agreement, coupled with fiscal and political doubts as investors prepare for tougher commodity and tourism terms. The Dominican Republic remains in favor as El Salvador is shunned, with Costa Rica and Panama under increased skepticism. In the sub-region only Honduras is under a formal IMF program, but that protection is unable to stoke confidence in the face of harsher US import and immigration restrictions in the next administration. The President-elect has vowed immediate deportations of millions of illegal workers starting with convicted criminals, and wholesale renegotiation of hemispheric commercial accords since original ratification decades ago. El Salvador’s 2 percent growth is the area’s slowest as mining hopes were dashed, and the 3. 5 percent of GDP fiscal deficit is to be funded by $550 million in external bond issuance following delayed congressional approval. Half the 65 percent of GDP public debt is domestic, and $1 billion in short-term Treasury bill flotation the latest cycle was a record. The trade shortfall has been roughly offset by remittances above 15 percent of output, but annual 5 percent growth could halve under new Washington curbs, also expected to slash anti-poverty and economic reform foreign aid which fell under a special program during the Obama years. The Dominican Republic’s 6 percent expansion pace is triple its neighbor’s, with gold exports and domestic financial service and retail demand notable fresh drivers. Inflation is half the 4 percent target, but could creep up in 2017 with higher energy costs. The current account gap is modest at 1. 5 percent of GDP, as visitor earnings jumped 10 percent to $5 billion through September, with 15 percent from South American vacationers. Remittance flows are the number three foreign exchange earner, and finance local small business as well as basic household needs according to studies, so a northern crackdown could quickly translate into depressed consumer and corporate sentiment.

Costa Rica’s economy has advanced 4 percent with telecoms and transport sector strength, on negligible 1 percent inflation. The 6. 5 percent of GDP budget hole continues to defy consolidation efforts pledged by the government in its core platform, but politically untenable with its weak parliamentary influence. Currently 95 percent of spending comes from legal and constitutional mandates that remain sacrosanct and require annual double-digit borrowing increases. The large trade deficit is also structural and despite high-tech hub ambitions, tourism and related industries are still the competitive mainstays, with potential employers criticizing the local skills base. Panama is growing a healthy 6 percent and budget retrenchment has progressed under a responsibility law, with the investment-grade sovereign rating intact. However inflation is approaching the 4 percent target and infrastructure development may have peaked with completion of the Canal widening project. Revenue was projected to rebound 15 percent next year before the prospect of trade conflict, on the heels of the Panama papers anti-corruption and money laundering setbacks. The Trump team backs a push to repatriating offshore funds parked for tax and regulatory advantages to spur a cash migration wave for its own public works schemes, according to bankers bewildered by the successive sagas.

South Africa’s Disguised Anti-Fraud Frown
2016 November 25 by admin

Posted in: Africa
South African shares and the rand steadied as abuse charges were dropped against Finance Minister Gordhan and President Zuma won a narrow no-confidence parliamentary vote victory with record ANC abstentions after the courts reinstated hundreds of corruption counts against him. A separate judicial inquiry into ties with the influential Gupta family warned of “state capture” by insider interests and both the ruling party leadership and political opponents have demanded a wholesale purge in the government’s top ranks to restore economic confidence. GDP growth will be less than 1 percent this year and the budget deficit will stay at 3. 5 percent under the new medium-term plan, setting the stage for an end-year sovereign ratings downgrade to speculative. Lower tax revenue will be offset by asset revaluation and other measures without major state enterprise stake sales, and the blueprint is murky on further guarantees and recapitalization for power giant Eskom which has already been demoted. Investment-grade fund managers may dump billions of dollars in holdings, which could cramp external bond performance already lagging the EMBI’s double-digit gain. The fractured domestic picture coincides with further signs of the regime endgame in Zimbabwe, as even the security forces express discontent over salary squeezes with the chronic dollar and goods shortages. Under a new currency plan the government will seize bank accounts and replace greenbacks with artificial IOUs, as international reserves may be exhausted and the fiscal deficit is estimated in the 10 percent of GDP range. However $100 million in arrears to the IMF were repaid, by using escrow proceeds in the SDR account, but $1. 5 billion is still due the World Bank and African Development Bank. The Fund acknowledged the clearance but stressed that financing access remained off the table, pending a “strong reform agenda. ” The stock exchange has been one of the only safe havens since the dollar printing and a Sub-Sahara Africa MSCI pacesetter, even though foreign investment is negligible.

Nigeria in contrast was down 30 percent through end-October as the naira drifted toward 500/dollar in the free market, which has been the target of unrelenting central bank rule changes and raids. It has propelled inflation toward 20 percent with the economy in recession despite global oil price rebound. President Buhari promised launch of a comprehensive recovery plan after a year and a half in office, and agreed a $5 billion settlement with previous joint venture partners as the state petroleum company undergoes restructuring. With 50 percent currency depreciation since June’s flotation and absence of a coherent adjustment program, multilateral lenders have hesitated to offer billions of dollars in requested balance of payments aid. Banks are again ailing, and the AMCON bad loan arm is in need of additional resources as lawmakers continue to delay budget approval. Portfolio investment has stalled with bond index expulsion as MSCI ponders stock suspension, and FDI may have been set back $400 billion the past year, according to Nigerian-American Chamber of Commerce calculations. The President has disappointed business supporters with his authoritarian management style and anti-corruption and terror focus while poverty and structural issues fester. They argue that the resumption of Delta rebel activity should be met with policy solutions beyond his soldier’s instinct as financial battles complicate conflict.



Ex-Yugoslavia’s Brooding Breakup Scars
2016 November 25 by admin

Posted in: Europe
S&P Ratings offered a 25-year retrospective on the former Yugoslav republics since independence in a November report, with most in the “B or BB” category topped by Slovenia’s “A” grade. Creditworthiness has dipped over the decades due to legacy issues, including ineffective institutions, low income levels and poor public finances. EU accession is a long path, monetary regimes are often fragile, and current account deficits are large as history and economic fundamentals remain deterrents to sustained modernization and recovery, the agency points out. When Tito died as the unifying figure of the original bloc external debt was out of control with only a sliver of FDI to offset it, and a balance of payments crisis was soon followed by hyperinflation and revival of ethnic and religious hatred. Croatia and Slovenia were the first to break away, but the single market imploded and Bosnia and Herzegovina with its pluralist makeup descended into civil war. Corruption and governance are still roadblocks with bottom rankings in the Transparency International Index and the World Bank’s Doing Business indicators. Slovenia is the only dual EU and euro member, and Macedonia and Montenegro are in the back of the entry queue. Three countries use currency pegs, and euro use is heavy throughout the zone with limited local unit confidence. On fiscal policy loss-making state-owned firms are the “Achilles heel” with inefficiencies and bad management inherited from the federation era, according to the review. Slovenia had to rescue three government-run banks in 2013 at a EUR 3 billion cost and debt/GDP ratios are in the 65 percent range for the sub-region, almost double the average for peer sovereigns. Domestic capital markets are underdeveloped and in four countries 40 percent is foreign currency-denominated. Traditional heavy industry emphasis left an uncompetitive company base and bureaucratic tendencies and lagging infrastructure aggravated the predicament. Hundreds of public banks and companies stymie the private sector and divestiture programs have proceeded slowly, typically under IMF-ordered adjustments. Big shadow economies and emigration and “brain drain” have resulted from formal lack of employment and productive capacity, and the low savings rate further impedes urgent investment, S&P comments.

War destruction and incomplete market transitions have fueled capital goods import demand, and consumption was also financed by external credit leading to late 2000s crisis. Remittances and tourism have helped bridge the trade gap but inward direct and portfolio inflows remain weak. Companies and banks have deleveraged since the collapse but government foreign debt loads continue to increase. The analysis concludes that 45 years “under the Yugoslav flag” is a lingering burden, with a few bright spots but a massive unfinished agenda. Incomes are growing and conflict has been absent for 15 years, but public and international finances are stretched and currencies and institutions suffer from minimal trust. Medium-term annual GDP growth is in the 2-3 percent range, and although rating outlooks are stable, credit metrics will improve “very gradually. ” EU and NATO membership should be anchors, but expansion sentiment has waned as the organizations focus on their own survival and future direction. More liberal exchange rate regimes could develop eventually but not in the immediate rating horizon still blocked by Tito period darkness, the report cautions.









Russia’s Friendly Takeover Tinkering
2016 November 16 by admin

Posted in: Europe
Russian shares continued to lead Europe after a 25 percent MSCI advance through October as 70 percent government controlled Rosneft bought out smaller state oil firm Bashneft for $5 billion and President Putin’s favored candidate Trump became his US counterpart. The energy tie-up represented a consolidation move and big name deal for the purchaser under international sanctions and the stock exchange which has lacked M&A activity. Rosneft’s biggest contract is with the Chinese for 25 years’ supply, and it had over $20 billion in cash to complete the transaction. The President insisted it met the privatization test with independent valuation, and a minority Rosneft stake will go next on the sales block with proceeds used to cover the budget deficit. British Petroleum retains a 20 percent share in Rosneft after it was squeezed out, and Western investors have since shunned participation with the chief executive also on the sanctions list as an individual, amid broader economic and governance fears as the state’s share of GDP had doubled to 70 percent in recent years. Officials admitted to Trump campaign contacts but continued to deny cyber-attacks against the Democratic Party opposition after the public release of confidential communications. The President-elect vowed friendlier relations with Moscow for joint goals like fighting ISIS in Syria, and tried to place Crimea’s return in historical context on his platform. His early campaign head had been an adviser to Ukraine’s ousted President and promoted Kremlin ties for his lobbying business.

Amid the intrigue, the central banks in both countries have managed tight monetary policies and sector cleanups to help restore foreign investor confidence. Russia’s regulator has closed almost 300 banks for questionable practices and prudential shortfalls, and the benchmark rate is 10 percent on 6. 5 percent inflation. Governor Nabiullina has been a regular Putin counselor, despite early criticism over her handling of the 2014-15 crisis when she dipped into foreign exchange reserves and doubled interest rates to defend the ruble. The exchange rate regime has since moved to free float, and she has refused further easing to aid growth consider stymied more by structural factors. Currency stability has enabled Russian companies to resume external debt issuance, with September a strong month of oversubscriptions as European buyers creep back to the market pending further boycott clarification. Ukraine’s central bank chief likewise shuttered 85 institutions including number two private lender Delta, although the biggest Privatbank has thus far been spared despite half its book owed to connected companies. The average NPL ratio tops 50 percent, and recapitalization is a hallmark of the World Bank’s restructuring program supporting 1 percent GDP growth this year. Privatbank’s credit rating is near default and its owner, oligarch Igor Kolomosky, has become estranged from President Poroshenko after he underwrote Ukraine’s eastern defense against Russian-backed incursions. Despite a nominal cease fire the war zone around Donbas remains active, frustrating the efforts of international agricultural firms to secure land and farm export capacity. The conflict destroyed a Cargill seed processing plant, but it put $100 million into a new grain terminal, and Bunge the world’s largest soybean supplier has a presence as well. They still criticize the ban on outright foreign ownership and the high cost of local funding, but possible durable peace with Western reconciliation would increase the harvest.

China’s Manipulative Mood Bending
2016 November 16 by admin

Posted in: Asia
Chinese “A” shares stayed in a rut trying to escape double-digit MSCI loss and the Yuan slipped past 6. 8/dollar as President-elect Trump added to economic and banking drift with his threat to impose high import tariffs after a “currency manipulator” finding. That designation has never appeared in the history of US Treasury reports, and the latest one reversed traditional criticism to praise market-determined direction, and attributed depreciation to strong capital outflows. Reserves fell another 45 billion in October to $3. 1 trillion, a 5-year low, but central bank intervention accounted for just one-quarter the drop, with the rest dollar-euro valuation effects. The IIF calculates net outflow at $450 billion this year, $200 billion less than in 2015, and cites its long-term asset diversification benefits along with negative implications. The foreign exchange body SAFE reiterated tight monitoring of cross-border movements, while at the same time noting the hundreds of billions in holdings abroad of many state banks and government entities not counted in the reserve figure. Insurance policy purchase through Hong Kong has been a recent crackdown target for individuals, and authorities are also closely tracking institutional investor offshore bond allocation. At home Bitcoin has been a popular alternative with prices up 25 percent since September, and transaction curbs may soon be introduced. Average citizens are also looking to real estate investment abroad as values resumed their rise nationwide and the bulk of new bank lending was mortgage-related. Property sales rose 25 percent from January-September according to the statistics bureau, more than double the pace of retail, industrial and fixed asset activity. The PMI index was 51 in October as services exactly matched the overall 6. 7 percent growth rate. Consumer inflation was 2 percent, and exports tumbled for the seventh consecutive month notwithstanding the prospect of US trade war with President Trump in office. A structural tourism deficit joins it with the Chinese visitor spending overseas, and the renimbi share in global payments remains stuck around 2 percent with this pattern, according to SWIFT. The November-January seasonal period typically sees high dollar demand, and the central bank has hinted at further restrictions with potentially frosty relations between Beijing and Washington.

Political changes may reflect a siege mentality as the Communist Party endorsed President Xi as core leader, a precedent last set by Jiang Zemin 25 years ago after the Tiananmen Square confrontation. The reformist Finance Minister was also ousted and replaced with the tax administration chief in a further power consolidation move. The Standing Committee also ordered additional access to foreign company technology and internet operations as anti-crime and national security imperatives, and may remove member age limits to protect President Xi’s allies. Bank Q3 earnings were flat on reported bad loans at 1. 5 percent of the total. Credit default swaps were launched and the distressed debt securitization pace has picked up with an updated framework. The first debt-equity swap was completed for RMB 5 billion between China Construction Bank and Yunnan Tin Group as 1000 bankruptcies were filed in the first half, a 50 percent annual jump. Fitch Ratings described the mechanism as reducing headline leverage but not underlying risk, as the IMF warned the window was “closely quickly” to forestall credit crisis, which could cost 7 percent of GDP as another war casualty.

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The Trump Triumph’s Truculent Trades
2016 November 10 by admin

Posted in: Currency Markets
Emerging market currencies, particularly Asian and Latin American ones in the cross-hairs of promised trade pact renegotiation and retaliation, were roiled by US President-elect Trump’s victory, which may also coincide with a Federal Reserve December rate hike with good continuing job and GDP growth numbers. Protectionism would exacerbate the underlying trend of flat global export expansion as countries try to shift to boosting domestic demand, aided by cross-border capital inflow return as of mid-year according to industry and official figures. They may also ease fiscal and monetary policies, but deficits and possible exchange rate implications narrow maneuvering room. Units in Mexico, Korea, and China have been most directly exposed, but the impact reaches to South Africa’s rand as a universe proxy, the zloty as an EU estrangement bet and Russia’s ruble as a reconciliation one, and to Middle East plays that may reflect future commodity and geopolitical direction. The Mexican peso dipped below 20 per dollar after the win, as authorities prepared to intervene after meeting the budget deficit target and raising benchmark rates 150 basis points the past six months. State oil company PEMEX bonds also fell as the December block auction may receive few bids pending the Washington administration shift, which could jeopardize $15 billion in proposed facility spending. The central bank and finance ministry announced contingency plans ahead of the election to sell dollars from reserves, and the Trump campaign’s immigration, border wall and NAFTA revision platform sours the outlook but they have refrained from action barring major depreciation translation into consumer inflation, projected at 4 percent next year. The candidate blamed the tripartite trade deal for the loss of manufacturing jobs north of the border and threatened to scrap it, while Democratic Party standard bearer Clinton also pushed for further labor and environment standard changes. Despite the pressure on Mexico’s auto and assembly operations services have been a main pillar of 2 percent GDP growth and would not be as upset by treaty overhaul. Remittance flows have been slowing even with US real estate recovery, but mass illegal migrant deportation would further pare them while swelling joblessness at home as another minimum wage increase is under consideration.

Korea’s won as an export heavy Asian proxy has also been battered, after it was named along with China on the US Treasury’s currency manipulation watch list, with the central bank warned to interfere only with “disorderly” movements. The bellwether Samsung conglomerate is literally under fire for exploding batteries in its smart phone, and lead shipping group Hanjin is barely afloat after state bank rescues. Overseas sales dipped 3 percent in October and growth will be only 0. 1 percent this quarter according to estimates. North Korea saber-rattling has been frequent in recent months with ballistic missile tests focusing attention on continental nuclear capability. President Park may have entered lame duck status early amid resignation calls after she admitted to a long personal and professional relationship with a fortunetelling adviser, who may have used influence to secure contracts and tip policy decisions. She reshuffled the cabinet and offered a public apology accepting an independent inquiry with her popularity at a record low 5 percent. The stimulus budget is on hold, and pledged structural reforms may await her successor in another featured anti-establishment contest.





Euro Denomination’s Singular Corporate Signposts
2016 November 10 by admin

Posted in: General Emerging Markets
The euro-specific corporate universe now stands over $150 billion or one-tenth the total, and the investor base from investment-grade to high-yield buyers despite the absence of a currency-specific benchmark, according to new JP Morgan research. Fund managers often switch or add exposure along the curve in names like Pemex and Petrobras, even as all-in yields are lower, and the ECB’s recent targeted purchases up to EUR 10 billion/month have strengthened the trend. Russian and Brazilian rating downgrades increased representation in Global speculative euro indices to 10 percent, with sell side dealer sponsorship.